There is a new idea being floated as a way to address the housing crisis. Some municipal governments believe they can actually “help” the situation by using eminent domain as a tool to rescue underwater mortgages. In City Journal, Nicole Gelinas reports that local governments would “use the power of eminent domain to seize mortgages from existing investors, write down the mortgages’ value, and sell the lower mortgages to new investors.” First promoted by the consultancy firm Mortgage Resolution Partners, many local governments would justify it on the grounds that taking private property would further a public purpose — that is, “to jump-start local economies.”
Gelinas outlines several objections to this approach, including that the eminent-domain plan “relies on a top-down assessment of how much a house is worth, not on market signals” and that “many of the homeowners whose mortgages municipalities would seize also have second mortgages,” thus making the remedy incomplete. She also points to the slippery slope this heads down: “if residents’ rights trump property rights, a town could just as easily seize an apartment building whose landlord wants to raise rents and hand it over to the tenants, achieving the same “public purpose.”
New York University professor Richard Epstein adds that “this whole proposal seeks to create something out of nothing, and like all such schemes, necessarily fails” and offers more analysis.
“The scheme is, moreover, subject to all sorts of political corruption, for once borrowers know of the system, they can collude with the so-called middlemen to have their mortgages on the list. After all, what borrower is against paying less. So this turns out to be nothing more than a fancy con game, in which two parties use the power of eminent domain to pillage a third.”