Taking “Underwater” Mortgages by Eminent Domain (Cont’d.)

The news story about a proposal to condemn “underwater” mortgages for their current fair market value and then make a deal with the homeowner-mortgagors whereby their loan balances would be written down to such fair market values (presumably plus an increment for profit to the movers behind this proposal, who would also raise the funds for its implementation) is spreading on the internet. Today’s Google Alert on eminent domain, for example, has six items about this stuff.

But what we find interesting is that so far nobody writing or blogging about this proposal has shown any sophisticated understanding of eminent domain law, particularly when it comes to valuation. What these folks seem to overlook that a vast majority of eminent domain cases that are litigated deal with controversies  over valuation, not the right to take, even though it is the latter — especially after the Kelo case — that gets the publicity.

But valuation of mortgages, particularly valuation of mortgages that are bundled into securitized bonds, or owned by Freddie and Fannie or insured, or guaranteed by the feds, will give rise to unprecedented valuation problems that will keep the courts and condemnation lawyers busy for years to come.

If you are interested in those problems, scroll down and check out our posts on this subject, dated June 1, 2012 (click here), and June 22, 2012 (click here).