Eminent Domain Proposal Revived

April 22, 2013

A controversial proposal that would allow local government officials to use the authority of eminent domain to condemn residences with distressed mortgages is reportedly gaining traction in California once again.

The proposal is being resurrected after facing sharp criticism a few months ago from Wall Street trade associations, such as the Securities Industry and Financial Markets Association and the Association of Mortgage Investors, as well as investors in mortgage-backed securities. 

However, Mortgage Resolution Partners (MRP), a San Francisco-based financier group, has signed advisory agreements with five California towns that would permit MRP to negotiate “a sharp reduction in the dollar value of distressed loans that are held in securities administered by banks and mortgage service firms,” Reuters reports. MRP’s strategy is reportedly to get voluntary agreement among servicers and banks to reduce the principal owed on underwater loans or to use eminent domain to “forcibly seize the loans and restructure them at a lower price,” Reuters reports. 

MRP has argued that eminent domain provides municipalities an opportunity to help home owners who are struggling to pay their mortgage. However, critics argue that using eminent domain to rewrite home loans would violate agreements between a bank and a borrower. 

"This type of government intervention is only going to harm the housing market," Chris Katopis, executive director of the Association of Mortgage Investors, told Reuters. "This is not a fair and equitable solution."

MRP’s agreement has been signed with the Californian cities of Richmond, El Monte, La Puente, San Joaquin, and Orange Cove. MRP is reportedly also negotiating with local officials in North Las Vegas, Nev.

"It's not a panacea to deal with the broad issue of foreclosure, but it is another tool that could be potentially effective," Bill Lindsay, the manager for Richmond, Calif., told Reuters. 

Source: “Eminent domain to fix troubled mortgages makes a Calif. comeback,” Reuters (April 16, 2013)

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