Eminent Domain Battles Brew Again

November 18, 2013

Despite threats from Wall Street and organizations, more cities are considering a controversial plan to use their eminent domain powers to seize underwater mortgages. 

One of the latest cities to consider using eminent domain in this new way is Irvington, N.J., which is conducting a legal study of the plan. The city wants to employ what it has dubbed “friendly condemnations,” using incentives to persuade owners of underwater properties to drop any objections to the city purchasing mortgages where the owner owes more than the mortgage is currently worth. Officials there say the plan can help prevent up to 1,000 foreclosures in the city.

This summer, Richmond, Calif., in the San Francisco Bay Area, became the first city in the country to adopt a plan to use eminent domain to seize mortgages. The city intends to identify homes that are underwater and first approach the owner with offers to buy the mortgage and then reduce the debt on the mortgage. Though Richmond hasn’t deployed its plan yet, if the owners refuse to let the city buy the mortgage, the city maintains that it can use eminent domain to condemn the home and take ownership that way. 

Plans to use eminent domain to seize mortgages have received widespread backlash. Critics argue that taking mortgages in this way is a breach of individual rights, and that investors who own many of the homes targeted will not receive fair market value for the mortgages. 

The Federal Housing Finance Agency, the overseer of Fannie Mae and Freddie Mac, has threatened legal action against cities who eminent domain in this way. FHFA has called it “a clear threat to the safe and sound operations” of the mortgage giants.

Also, NAR's Board of Directors adopted a policy position earlier this month opposing this use of eminent domain. Under the policy statement, the association says it understands the need to help struggling home owners, but that taking mortgages hurts the availability and affordability of financing for borrowers because of the uncertainty it creates for lenders and investors. At the same meeting, the board authorized the distribution of $485,000 from NAR's Issues Mobilization program to the West Contra Costa, Calif., Association of REALTORS® to help it fight the use of eminent domain to seize mortgages in Richmond.

Some cities have since retreated from similar plans, such as San Bernardino County and North Las Vegas. However, more cities across the country continue to weigh using eminent domain to seize mortgages. For example, Yonkers, N.Y., city officials will soon consider a resolution to study the use of eminent domain to reduce debt. Two California cities—Pomona and Oakland—as well areas in Minnesota and two cities in Pennsylvania, are reportedly considering similar plans. 

Source: “More Cities Consider Using Eminent Domain to Halt Foreclosures,” The New York Times (Nov. 15, 2013)

Read more: 

Legal Threat Over City’s Eminent Domain Plan
FHFA to Cities: Don't Abuse Eminent Domain