Eminent Domain: Can Local Governments Seize Homes To Help Homeowners?

[Link: Can Cities Use Eminent Domain To Seize Mortgage Loans?] 

It seems like a good idea: if lenders won’t work with troubled homeowners to restructure underwater mortgages (loans where more is owed than the home is worth), local governments will. Using their rights under eminent domain laws, cities and counties would seize those properties and work out their own deals to allow borrowers to stay in their homes.

But can it work? Bloomberg Law’s Lee Pacchia talks with Richard Leland, real estate attorney at Fried Frank, and Robert Hockett, who advises Mortgage Resolution Partners – a company set up to help local governments seize and restructure underwater loans – about the legalities surrounding this plan. 

Some highlights of their video conversation:

• Just under 24% of U.S. homes are underwater, including about half of the homes in San Bernardino County, California (the municipality currently considering the use of eminent domain to tackle the housing crisis)

• Courts and state legislatures are looking very closely at what constitutes “public use” and what constitutes appropriate use of eminent domain, which will likely lead to years of litigation around the practice should it be allowed to proceed

• There has been strong backlash against the use of eminent domain for the purposes of “economic revitalization” since the Supreme Court upheld Kelo v. City of New London, allowing the seizure of private homes for the public purpose of economic development 

Additionally, here’s an overview of the eminent domain plan currently being considered by San Bernardino County, from law firm Dechert LLP:

 “Under the Program, local governments would take title to the mortgages (not the underlying real property) and pay the mortgage holders ‘fair market value’ using money provided by institutional investors. The government and investors would then issue new mortgages to homeowners writing down the loan amounts to slightly below the fair market value of the home, which would enable distressed home-owners to acquire equity and reduce their monthly payments. The restructured mortgages could then be sold to third-party investors… 

This Program is a novel proposal, and as pointed out in recent news and by trade associations like the Securities Industry and Financial Markets Association and the American Securitization Forum, there appear to be strong arguments that the Program would be not only unwise as a policy matter, but unconstitutional.” (California County Considers Using Eminent Domain to Seize Underwater Mortgages) 

A final note: file under “what goes around, comes around.” In an added wrinkle, the Ninth Circuit recently upheld a lower court ruling giving the Federal Government the power to seize under eminent domain laws lands held in public trust by the state of California. From law firm Sheppard Mullin:

“… the Ninth Circuit held that the power eminent domain grants the federal government a new title unencumbered by a state’s public trust interest, regardless of whether it later conveys the land to a third party. The court states that ‘[h]aving paid just compensation, the United States is entitled to the interest it sought in its complaint in condemnation: full fee simple, free of California’s public trust.’” (Federal Government’s Eminent Domain Power Trumps California’s Sovereign Public Trust Title) 

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Read the updates:

• California County Considers Using Eminent Domain to Seize Underwater Mortgages - Dechert LLP 

• Federal Government’s Eminent Domain Power Trumps California’s Sovereign Public Trust Title - Sheppard Mullin Richter & Hampton LLP 

• San Bernardino County Resolution Establishing Homeowner Protection Program via Eminent Domain - Orrick, Herrington & Sutcliffe LLP 

• Court Erred In Excluding All Evidence Regarding Severance Damages In Eminent Domain Action - Kronick, Moskovitz, Tiedemann & Girard 

• Substantial Justice in Eminent Domain Proceedings: The New Date of Valuation for Privately-Owned, Public Utility Companies - Butler, Snow, O’Mara, Stevens and Cannada, PLLC 

• Supreme Court Revises Test to Establish Common Carrier Status in Condemnation Cases - Jackson Walker 

• Six Years of Separation: Life After Kelo - Miller Starr Regalia 

• Florida Real Estate Litigation – Eminent Domain and its Limitations - Schecter Law 

• Proposed Constitutional Amendment on Eminent Domain: Cons and Pros - Sands Anderson PC 

• Due Process Revival? Post-Kelo Considerations Regarding Property Rights - Anthony DellaPelle 

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