The use of local governments' power of eminent domain, though widely thought of as an overreaching power sometimes wielded on behalf of the rich and powerful against small property holders, is more and more being discussed as a tool to aid homeowners facing foreclosure. It's been brought up as an answer to the crisis brought about by deflated home values. This year, activists working with the Occupy Wall Street movement have proposed eminent domain as a wide scale solution for keeping owners facing foreclosure in their homes. The proposed mechanism would have localities (or their appointed representatives) seize large batches of mortgage contracts at or below fair market value, allowing the homeowner to refinance at the fair market value. Proponents say that the solution would be politically and economically feasible. Recently, Michael Sauvante of the Commonwealth Group, spoke to an InterOccupy.org conference call on this subject, and his talk provides much of the substance of this article.
Eminent domain is defined in the final clause of the fifth amendment to the United States Constitution: "nor shall private property be taken for public use, without just compensation." It allows the federal or state and local governments to condemn and take a property, pay the owner a fair price for it, and use it for the public good, such as building a road. In recent years, especially following a 2005 case called Kelo v. City of New London, when a local government seized homes and turned them over to a private developer who planned to develop a mall, the power of eminent domain has been criticized as curbing the rights of ordinary citizens. The rationale of that case was that the economic benefits the community would receive from economic growth qualified the redevelopment plans as a permissible "public use."
Reviewing the history of proposals for use of eminent domain in the years since the recent economic meltdown, in 2008, Howell Jackson proposed that the U.S. Treasury use eminent domain to buy the mortgages underlying the derivatives based upon them which were now "toxic." The aim was to liquidate the pool of mortgage backed securities quickly. The proposal further envisioned that the Federal government would offer homeowners workouts and refinancings similar to the work done by the Home Owners Loan Corporation during the administration of Franklin Delano Roosevelt. Others at the time also referred to this New Deal program as a possible solution following the 2008 financial crisis, but the Bush and Obama administrations never seriously considered the matter, so far as anyone can tell. More recently, at least one writer has discussed eminent domain in regards to seizing properties held by big banks after foreclosure. The goal was to fill the now-empty foreclosed homes and stabilize communities at risk due to empty housing and declining property values.
In Arizona, one of the states hardest hit by the burst of the housing bubble, a bill unanimously passed the State Senate Banking committee to establish a state authority to purchase underwater mortgages at fair market value. After purchasing a mortgage, the Authority would offer the homeowner a new mortgage at no more than 125% of fair market value. Homeowners must not be behind in payments on their current mortgages, which means the bill would not help anyone currently in the foreclosure process. The original mortgage servicer would then choose to receive either a small payment now, or if they chose to wait, 101% of the current market value now plus a loss recapture certificate. The amount of the certificate would be the underwater amount, to be paid over time via bond sales. Hence, the bill is more generous to the banks than the plan discussed here.
In his talk to InterOccupy.org, Michael Sauvante noted that eminent domain applies not just to real property, but to contract rights as well. Specifically, it would apply to the mortgage contracts and promissory notes held by big banks against the homes of millions of people. He noted that suggestions to use eminent domain on behalf of beleaguered homeowners would surprise those campaigning against the power following the Kelo decision, including some who have had victories at the state level, as in the case of this legislation in New Hampshire.
The process, as Sauvante sees it, is as follows:
- As is the first step in all eminent domain proceedings, a local government (or its appointed representative, in this or any other step in these bullets that mentions "Government") makes an offer to the bank to acquire their end of a mortgage contract in cases in which the homeowner is still in the home. Foreclosure proceedings need not necessarily have been initiated.
- If the bank does not accept the offer from the Government, it then can be condemned and seized for a fair price, as set by the Government.
- The local government allows the homeowner to stay in the home and renegotiates a mortgage at the new, fair market value, which allows for considerably lower monthly payments.
The chief objection, as participants in the InterOccupy.org conference call saw it, was the costs of such a program. Sauvante responded that the funding necessary would be no more than the fair market value, and that after the first seizures, the newly revalued homes could be used as a basis to float bonds to fund further purchases. He pointed out that this can be a good deal for large banks facing massive amounts of foreclosures; it costs more to the banks to carry the foreclosure through the courts and maintain the empty property afterwards, giving local governments a great deal of leverage. Sauvante and the associates planning the program, which include a former State Attorney General, believe it would be possible to negotiate large scale turnovers of mortgages without going to court to exercise eminent domain, even possibly obtaining large numbers of mortgages for $1, provided they that they are all located in the government's jurisdiction. It therefore appears that the costs of such a program could be far less than those hearing of it for the first time might assume.
It was also noted that in the cases in which no clear owner of the mortgage can be proved, which would apply to many titles that have passed through the MERS system, local government has the option to seize the property with no payment whatsoever. Though the Obama administration, as some have noted, stated that the proposed Attorneys' General Settlement with the big banks does not release the banks from liability in this, William K. Black has noted that the state Attorneys General are not investigating mortgage origination fraud by major lenders, don't have the resources to do so, and the new working group formed for the settlement will not investigate mortgage origination fraud. If no release from liability remains the case, MERS fraud could provide additional leverage for local governments in negotiations to take over the mortgage contracts.
The current status of the project, according to Sauvante, is that of moving into the execution phase. During planning, those involved identified a weak link: that the lack of specific expertise in local governments, as well as shyness to take on the big banks could limit participation by local governments. Though one case to prove the point might potentially "open the floodgate," a scenario is being set up to meet both the limitations.
The right to use eminent domain can be assigned by a local government to a non-governmental entity, whether a for profit entity or non-profit entity, provided that the assignee uses it as prescribed in the assignment, and in the geographic area covered by that particular government. Governments use such assignment power to authorize, for example, a gas pipeline company to obtain property. In fact, TransCanada, which is laying the Keystone Pipeline, has been in the news due to opposition to its possible use of eminent domain.
Though cases as infamous as TransCanada's can be expected to produce challenges (the House of Representatives has passed legislation to limit the ability of local governments to use eminent domain for economic development), the demonstrable public good in moderating the foreclosure crisis is seen as providing protection against a similar challenge to this plan. It has been well documented that the general public suffers when too many foreclosed properties exist in a neighborhood: property values deteriorate, crime increases, property tax collection diminishes, financial scams increase, children suffer stress, and homelessness increases.
In the case of using eminent domain to seize properties in foreclosure, Sauvante and his associates are attempting to create a non-profit entity to step in and request local governments to assign the power to the non-profit as a solution to the problems that might limit participation. A non-profit providing a "package" solution would:
- Provide the expertise needed for identifying the properties and negotiating with banks.
- Provide the expertise for the legal process of eminent domain should negotiations not result in the turnover of the mortgage contracts and promissory notes.
- Assume the risks (e.g., court costs) should eminent domain be invoked and should there be legal challenges to the use of eminent domain in this manner.
- Provide the expertise needed for offering revised mortgages to the homeowners.
- Provide the expertise needed for being a landlord to the homeowners signing the revised mortgages.
- Provide the expertise needed to package the now-fair-market-value mortgages for sale in order to raise additional monies for the next round.
The proposed non-profit group would approach a locality to become the first case. It should be noted that the goal is not to test the use of eminent domain. In fact, the group prefers to "brandish" it as a "club" but not use it. Negotiations are seen to be quicker and effective, and as noted above, so much in the banks' interests that eminent domain may not be necessary.
Sauvante noted that a non-profit would also have the leeway to deal with small community banks differently than with large banks. In many cases he expects large banks to sell some mortgages at a nominal figure like $1. In such cases, the non-profit would still have the ability to resell the mortgage at a higher fair market value; for example, $10,000. Sauvante foresees the difference in those amounts not only as funding the program, but also as a means to provide flexibility to buy mortgages from community banks at higher prices than $1. Because the monies paid to such banks are far more likely to be reinvested in the community, such a scenario is in line with the purpose of the program.
It is expected that the group and its program shall begin helping homeowners in foreclosure soon, though an exact date cannot yet be predicted.
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