The Case Against Using Eminent Domain to Acquire “Underwater Mortgages”

Writing at Doublethink Online, Institute for Justice attorney Dana Berliner makes the legal and economic case against state and local governments trying to fix the housing crisis via eminent domain. She writes:

The mortgage market is incredibly complex, but one doesn’t need to understand it in order to see that the proposal involves transferring property (mortgages and mortgage securities) from their current owners to another set of owners, with a hefty profit going to the second owners and a hefty loss going to the first.  In other words, local governments are proposing to play favorites and to wield their enormous power to secure benefits for some at the expense of others.

Fortunately, the post-Kelo changes in state constitutions and state statutes will prohibit such shenanigans.  Cities claim that the benefit of these condemnations will be that they will make the cities economically better off and make the housing markets there stronger.  But when states prohibited condemnations for economic development in the wake of Kelo, they prohibited the use of eminent domain based on the vague and frequently inaccurate guesses of municipal officials about what might generally make their city better off economically.  California prohibits eminent domain for economic development (and did even before Kelo).  The post-Kelo legislative revisions emphasize that eminent domain is to be used sparingly and not for private benefit.  And California court decisions, along with those of Ohio, Pennsylvania, and other states, have grown increasingly wary of the use of eminent domain for private benefit.  Some other states, like Nevada, simply forbid private-to-private transfers.  Florida allows condemned property to given to other private parties, but only after a ten-year delay.  And Illinois places a high burden on government to prove that a condemnation that will result in private ownership is both for a primarily public purpose and necessary to achieve that purpose.  Eminent domain for mortgages will likely fail in all of these states and others.

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  • Almanian's Evil Twin||

    The fact anyone needs to be convinced this is a bad idea says....something not good.

  • RPR2||

    It will take Fannie, Freddie, FHA, VA, and private equity about 5 minutes to blacklist these jurisdictions and another 5 to start foreclosing as much as possible as fast as possible.

  • ||

    Seriously?

    Think about the effect that would have on the market. Suddenly, every house is at risk of seizure, every mortgage becomes more risky, every house is automatically worth less because it's a less stable investment, more people are underwater.

    Yeah, if your goal is to really fuck up the housing market, this is an excellent idea.

  • johnl||

    The good part is that the looting would drive down the value of the asset seized. So any city that managed to pull off this stunt could find itself underwater on the mortgages they seize.

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