A Southern California community is looking to a rarely invoked government power to save underwater homeowners from foreclosure.
Eminent domain is a government privilege usually invoked to acquire private land for public works like new roads and power lines, but San Francisco-based venture fund Mortgage Resolution Fund is calling for government officials in San Bernardino County to use the provision to seize the mortgages of struggling borrowers.
The banks controlling the mortgages would be paid a portion of what the homeowners owe from the fund’s account, and the government would allow the homeowners to refinance their homes with a federal loan based on its current market value.
If the plan is approved it could spark a wave of similar programs nationwide, coming to the rescue of millions of Americans working to recover from the housing market crash. Not only could foreclosures be avoided, but homeowners who were previously “underwater” could be given new financial mobility without the burden of an overpriced mortgage.
However, some detractors believe that the use of a government-sponsored loophole would only lead to further problems down the road, including a steep hike in mortgage rates for existing borrowers.
“We believe using eminent domain would reduce access to credit for borrowers and would, at a minimum, result in lengthy and costly litigation,” Timothy Cameron, a managing director of the Securities Industry and Financial Markets Association, told the Huffington Post.
Chris Katopis, executive director for the Association of Mortgage Investors, questioned the legitimacy of the plan. “The math around eminent domain does not work under any circumstance,” said Chris Katopis, the executive director of the Association of Mortgage Investors. “You would be robbing Peter to pay Paul.”
Residents of San Bernardino consider the plan to be a “bailout” for homeowners, who owe thousands more on their mortgage than what their homes are actually worth. A public hearing was held on August 16 by a government panel to consider what measures should be taken to fight foreclosures. Though Mortgage Resolution Partners has not yet submitted a formal plan, the community leaders remain open to the possibility of invoking eminent domain.