A proposal suggesting the use of eminent domain to aid underwater borrowers continues to spread to various municipalities despite significant pushback from the mortgage industry.
The most recent push is in the city of Irvington, N.J., where officials and neighborhood activists are considering eminent domain as a means to help troubled homeowners.
The list of counties and cities that have briefly considered eminent domain tells a very specific story: One in which hardest-hit communities are searching for solutions to foreclosure-blighted neighborhoods in the aftermath of the largest housing crash since the Great Depression.
Yet, analysts like to point out that eminent domain does little to cure these issues since it's designed to help only 'current' borrowers.
As for what cities have considered eminent domain, many of them are located along the West Coast.
California tops the list, with several local cities taking a second look at the plan.
So far, the California county of San Bernardino has considered eminent domain and killed it. Other areas were it has been at least considered include Brockton, Mass., which has already rejected it; North Las Vegas, NV; and Chicago, which held a city council meeting on the proposal, analysts say.
The California city of Richmond went the furthest, accepting the proposal without implementing it. The city is currently the greatest threat to investors, but it also faces a serious litigation threat if it decides to actually implement such a plan.
Other areas that have at least considered eminent domain include El Monte, Calif., and the California cities of Pamona and Salinas, according to Chris Killian, managing director for SIFMA’s Securitization Group.
But with investors and mortgage industry partners ready to file suit to protect their interests in affected mortgage pools, Killian has watched eminent domain proposals die off in several cities after the initial pitch.
He says many cities look at the proposal early on and believe it can save homes at no cost to the city. It’s not until the threat of litigation from investors and other interested parties hits the cities that they realize "the costs outweigh the benefits in this" and there is a "level of risk the cities don’t want to take on," Killian said.
Eminent domain first gained the public’s attention in San Bernardino County, Calif., when the county explored the idea of addressing negative equity by using private capital supplied in part by the plan’s chief advocate, Mortgage Resolution Partners. The idea included plans to acquire underwater mortgages, writing down the principal and then refinancing the loans.
Killian says the list of municipalities that have considered eminent domain includes several “locations that have struggled coming out of the financial crisis in the last couple of years.”
These are places usually facing higher rates of foreclosure and delinquencies, he points out. Yet, despite the re-emergence of the eminent domain escape plan, he sees a constant threat of litigation from investors as an ongoing deterrent for city officials.
"The pitch that the municipalities are offered is a costless transaction that helps their constituents," says Killian. "Without looking into it, it’s a pretty attractive proposition."
But once the risk of litigation alone is weighed in, “what you see is a lot of people looking at it and saying it’s not what I thought it was.", he said.
