The eminent domain brush fire
By Matthew Goldstein
It didn’t take long for the powerful voices on Wall Street to rise up in protest over an intriguing and controversial idea to condemn distressed mortgages through local government’s power of eminent domain.
Two weeks after Jenn Ablan and I first reported that officials in San Bernardino County, Calif. were giving serious consideration to the novel idea being pushed by financier-backed Mortgage Resolution Partners, 18 financial trade groups are voicing strong objections. The groups, led by the Securities Industry and Financial Markets Association, are concerned that if local governments can seize underwater mortgages it might discourage bank lending. Why? The argument is that if it can happen now, who knows when local governments might move to condemn mortgages again–crisis or not.
The unified opposition may make it difficult for Mortgage Resolution Partners, which says it is talking to public officials in Nevada, Florida and on Capitol Hill, to get much traction for its plan outside of San Bernardino. And if San Bernardino County goes forward with using private money to buy-up underwater mortgages held by banks and in mortgage-backed securities, a U.S. Supreme Court lawsuit challenging the legality of the measure seems more than likely.
And litigation, of course, takes time and it means it could be two years before any legal challenge to using eminent domain for mortgages get resolved. In other words, the goal of using eminent domain to keep struggling homeowners in their residences by reworking their mortgages in the eminent domain process could be years off.
The trouble is we don’t have two, or three years to wait for a resolution of the worst by-product of the financial crisis, which is that average Americans still sit saddled with too much debt — most of it housing debt. Last October, Jenn and I wrote how some economists were beginning to say “a great haircut” was needed to address all the debt hanging over the heads of ordinary Americans in order to jump-start the economy. And the calls for debt relief have only grown–it’s one reason Yale economist and housing guru Robert Shiller came out in favor of the eminent domain concept in a recent op-ed in The New York Times.
Is eminent domain the answer? It’s too soon to say and it’s not clear if it is constitutional, even though some legal scholars say it is. But if this idea sparks debate that’s not a bad thing.
Two years ago, I asked in a story whether we needed a Camp David style summit that would bring all the parties together (banks, bond investors, housing officials and consumer advocates) to has out a Marshall Plan for housing. As the saga of the housing crisis is now well into its fifth year, it’s a question that’s worth asking again.