County officials in San Bernardino, Calif., may soon use eminent domain to confiscate homeowners’ properties to relieve them of their underwater mortgages in a convoluted and costly plan that may cause more than a few legal headaches.
The local government plans to purchase the homes at their current market value, then offer them back to homeowners for the same price.
Nearly half of all homeowners in San Bernardino — approximately 150,000 people — have underwater mortgages, and the city recently became the third in California to declare bankruptcy.
“They have been having the debate about considering principal loan forgiveness for four years,” Anthony Randazzo, director of economic research at the free market think tank Reason Foundation, told The Daily Caller News Foundation. “The eminent domain component is just the most novel approach.”
Roughly one-fourth of American homeowners owe more on their house than it is currently worth. Nearly half of all mortgages in the United States are backed by Fannie Mae or Freddie Mac.
The Congressional Budget Office reports that the federal government has already given Fannie Mae and Freddie Mac $130 million in cash payments, and the real cost of these “government sponsored enterprises” to the taxpayer has been estimated at over $300 billion.
Edward DeMarco, the director of the Federal Housing Finance Agency, testified before Congress that principal reductions actually hurt taxpayers and pose a “moral hazard” that might lead people to purposely stop making payments to benefit from the program.
The market will not price the mortgages in the San Bernardino scheme, Randazzo added. Instead, lawyers on behalf of the city will try to guess the value of the loans.
“It strikes at the heart of the contractual relationship underpinning the securitization of mortgages and the relationship between lender and borrower,” Edward Pinto, a scholar at the American Enterprise Institute, said in an analysis.
Pinto added that the scheme would open the doors for years of lawsuits brought against the city, and Randazzo said he isn’t sure the plan will even benefit people who are actually in financial crisis.
“A home that is underwater is simply worth less than the mortgage is,” Randazzo said. “It doesn’t mean that the homeowner can’t pay the mortgage.”
“This would be a wealth transfer away from private investors who are going to be taking substantial losses, and then other private investors who didn’t have to bear any cost are going to be able to buy these new mortgages that have been written down to 2012 prices and are much more likely to be repaid,” Randazzo added.
Steven Gluckstern, whose firm Mortgage Resolution Partners would handle the program on behalf of the county for a flat fee, had a more optimistic outlook.
“In [my] view, this is helpful, not harmful,” Gluckstern said, adding that he thought the move will stabilize home prices.
Whether the plan is constitutional remains unclear. The county’s board of supervisors unanimously approved the scheme in mid-June, but county spokesperson David Wert insisted details have yet to be ironed out.
Content created by The Daily Caller News Foundation is available without charge to any eligible news publisher that can provide a large audience. For licensing opportunities of our original content, please contact firstname.lastname@example.org.