Editor: David Reiss
Brooklyn Law School

August 8, 2013

Underwater Mortgages Eminent Domain Battle Gears up

By David Reiss

I was quoted in a recent story in, Eminent Domain Mortgage Battle Is a Lose-Lose Situation.  It reads in part,

The move by Richmond, Calif., to seize “underwater mortgages” from private investors using its powers of eminent domain has drawn controversy and consternation within the mortgage industry.

The law has mostly been used to seize property for public purposes such as building roads, highways or schools and other critical infrastructure.

Richmond is now testing whether the rule can be applied to seizing underwater mortgages.

Home prices in Richmond, a city with a population of a little more than 100,000 and a significant Hispanic and African-American presence, are still far below peak levels. More than half of its homeowners are underwater — they owe more than their homes are worth.

Richmond Mayor Gayle Mclaughlin said eminent domain is the only way to help borrowers and repair the local economy, as investors of private-label mortgages have been either reluctant or too slow to provide relief to borrowers.

The city, partnering with San Francisco-based Mortgage Resolution Partners (MRP), began sending letters to owners and servicers of 624 underwater mortgages this week.

If the investors do not agree to sell at the negotiated price, the city will seize the property through eminent domain.

The mortgage industry is, predictably, threatening a legal battle.

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“The constitutional challenges for this proposal are weak,” according to David Reiss, law professor at the Brooklyn Law School.

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The bigger source of legal conflict, according to Reiss and other experts, would be on determining what is fair compensation for a mortgage, especially one that is still current.

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“Courts tend to overcompensate properties taken under eminent domain as a general rule,” said Reiss. “The proponents of this rule may be underestimating how these mortgages will be valued.”

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Eminent domain is “theoretically a great idea,” said Reiss. “States certainly have the legal authority to try this experiment. But it is not clear whether the outcome of all this is beneficial.”

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