Condemnation of “Underwater” Mortgages (Cont’d.)

The wretched idea of some San Francisco vulture-capitalist  “investors” who are out to make a buck from “underwater” homeowners’ misery shows no sign of going away in spite of the fact that the feds have indicated that they won’t allow it with regard to mortgages owned by them, which strikes us as sensible because they own (or insure) most of those mortgages, and it is incontestable that a county or city may not condemn federally-owned property. Nonetheless, this thing is now going viral/farcical, with the likes of Arianna Huffington and actor John Cusack — the noted eminent domain mavens — expostulating on the Huffington Post on what a wonderful idea this would be. In fact, they don’t know what they are talking about; they can’t even keep San Bernardino County and the city of San Bernardino straight, which in this case is important. The County of San Berdoo (as we Californians often put it) along with a couple of others, is dipping its toes into this murky water before formally filing such condemnation actions, whereas the City of San Berdoo is in bankruptcy and couldn’t pay for a chicken coop. This may strike you as a minor point, but as they say, “the devil is in the details,” and it does illustrate the depth of knowledge of some of the folks who have plunged into this subject in spite of their — shall we say? — modest degree of pertinent knowledge of the subject of eminent domain in general and the law of valuation in particular.

Another strange description of this caper comes from the Sacramento Bee (H. Sangree, Sacramento Area officials Explore Using Eminent Domain to Aid Underwater Homeowners, August 11, 2012). Hoo boy! Wait until you read this one. Sangree quotes one of the private machers behind this caper as outlining the following plan. Talk about creative appraising! He offers this as an example: say a homeowner paid $300,000 for his home which is now worth $200,000, with the mortgage worth $160,000. So you might think that  the “just compensation” payable for the mortgage would be $160,000 which is its Fair Market Value (FMV) as determined by the court. Right? But the way these folks figure it, they would renegotiate that mortgage and make the balance on the note secured by it $190,000 which would be $30,000 more than the FMV of the mortgage as determined by the court; i.e., what they paid for it, and a quick $30,000 for them (not to mention any fees exacted in the process). Nobody seems to be asking why the awesome sovereign government power of eminent domain should be enlisted in quest of quick private profit. Likewise, since this private profit element is the lynchpin of this caper, it is also peculiar that nobody is asking how the private interest is predominant, so as to justify the application of the power of eminent domain. We always thought that in private-to-private eminent domain property transfers, the public interest must predominate and the private benefit is limited to being incidental to it, as the court explained in County of Los Angeles v. Anthony.

None of these made-up figures used in the above example take into account the fact that these are performing mortgages these folks are talking about — the house may be underwater but the mortgage is performing; payments continue to be made on it as always.

All of that, particularly the value of the still-performing mortgage, would have to be worked out in litigation, and the prospective condemnees — the folks who own these mortgages, not the homeowners — are not your run-of-the-mill condemnees who typically meekly accept whatever the condemnor offers. It shouldn’t take these more sophisticated folks long to figure out that condemnees who reject condemnors’ (often lowball) offers, prepare their own valuation case, and take it to court with their own appraisal witnesses, usually demonstrate the lowball character of condemnors’ offers, and make out much better in court (whether before judges or juries) than by accepting the offer. And in California, when you demonstrate that the condemnor’s offer was unreasonable, you may be awarded your litigation expenses (including attorneys’ and appraisal fees) in addition to the award of  “just compensation.” So if this caper ever materializes, this litigation should be fun to watch.

Stay tuned.

Full disclosure. Your faithful servant was interviewed by Mr. Sangree, the author of the above-referenced Sacramento Bee article, and our views are noted and quoted in a subsequent Bee article – click here.

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