The recession and its calamitous impact on home prices have been on our mind, but we haven’t said much about it because, silly as it may sound, we didn’t want to let the cat out of the bag, so to speak, and give ideas to the bad guys. But reality is not to be denied, and our colleague Brad Kuhn on the California Eminent Domain Report blog of August 10, 2012, (click here) has plunged into this subject, so we may as well deal with it too. Our concern has to do with condemnation of “underwater” homes that are occupied by their owners — not the condemnation of underwater mortgages, a subject that has been taking up so much paper and electronic media lately. We have had things to say about the latter lousy idea that if implemented is likely to wreak havoc on the home financing markets — if nothing else, who will want to finance home purchases with the knowledge that in a down market, the government, fronting for a bunch of profit-seeking vulture capitalists, can just take the mortgage and turn it over to more favored investors? True, markets have a short memory, but all that is being overshadowed by the latest wrinkle.
As Brad Kuhn brings to our attention, it now turns out that some condemning bodies are taking advantage of the recession in order to condemn homes for conventional public projects using eminent domain — like the Bear Valley Parkway in San Diego County. There hasn’t been much of that because local governmet entities are pretty much tapped out, and in no position to be spending real money on land for public projects. But this is not the case in some situations. The problem is that the usual measure of “just compensation” is fair market value, or in California, the highest price that a willing but unpressured buyer would pay voluntarily for the subject property to a willing but unpressured seller, both parties being aware of the property’s good and bad features, and giving due consideration to the property’s highest and best use.
But if the subjet property is “underwater” that means that after such fair market value is paid, the home owners get nothing, beacause they have no equity in their home, and the entire award in such cases goes to the lender, leaving the homeowners literally out in the street — without a home and without any compensation. Kuhn provides us with an example of a homeowner whose home is $90,000 underwater. Worse, if the mortgage is not what we Californians call a “purchse money deed of trust,” such an owner would wind up in debt to the lender to the tune of $90,000. Reminds us of the notorious Mame Riley case in Washington, DC, in the 1950s, where the owner was turned out of her home with no compensation (which deprived her not just of a roof over her head but also of a small rental stream), and left her in debt to her lender.
The bad news here, the really bad news, is that under current law, nothing can be done about that should the condemnor pursue that route. The market is what it is, and it can be harsh,. And though our sympathy is with such homeowners, the bottom line is that one should be prudent and not go into debt in amounts one can’t handle in case of an economic downturn.
So stay tuned, and see to what extent government entities will go the “vulture” route and abuse underwater homeowners in this fashion. On the other hand, when a community really needs public projects, there isn’t much that can be done about this, barring new, creative solutions that those who govern those communities may come up with — assuing they are willing to try.