Whatever Happened to Condemnation of Underwater Mortgages?

It has been a while since the surfacing of the idea of taking underwater mortgages  by eminent domain– that’s the mortgages, not the homes encumbered by them — then reducing the principal to less than its nominal balance, and letting the homeowners continue living in their homes while allowing them to make lower monthly payments based on a new, adjusted mortgage loan balance. We have written about that from time to time, but now it appears that the would-be movers and shakers behind this caper may be having second thoughts. So says Reuters — see Matt Goldstein and Jennifer Ablan, Eminent Domain or Principal Reduction, the Bottom line Is Reducing Mortgsage Deb, Reuters.com, Nov. 26, 2012.

It turns out that the bloom is off the rose and the mortgage condemnation train has slowed down. Why? We don’t know for sure, but it seems likely that the realization has sunk in that the exercise of the power of eminent domain requires payment of just compensation. Evidently no one has thought through what that would entail quantitatively, and no one is eager to put up the money required to find out. Remember that the statutory “fair market value” that is the usual measure of “just compensation” requires payment of the highest price the property in question would bring if sold in a voluntary transaction by a knowledgeable but unpressured seller to a knowledgeable but unpressured buyer. And, as far as we can tell, nobody knows what the highest price of an underwater but performing mortgsge is.

Our perception is that at first, the promoters of this scheme saw it as easy pickings; they would pick up some performing but underwater mortgages at way below their value and clean up by letting the occupant-homeowners take over the debt service using a lower mortgage balance. But apparently, performing mortgages cannot be picked up for peanuts even if they are underwater. They represent a cash stream which no one is going to give away.

So stay tuned and see what happens.

Follow up.  It seems that the promoters of this scheme are also getting antsy about the aparent loss of interest (or at least the decline of press coverage of this caper) so they’re out there, beating the drums, and informing us that this lull in coverage is just a temporary thing, and just you wait ’til next year. And so we shall. In the meantime to read about what the world looks like from their point of view, check out the story by Joe Nelson,  Arguments Over Eminent Domain Mortgage Seizure Program Ramp Up for 2013, San Bernardino Sun, Dec. 1, 2012 — click here.

Leave a Reply

Your email address will not be published. Required fields are marked *