Category: Condemning “Underwater” Mortgages

Stop the BS About Underwater Mortgage Eminent Domain Takings!

Richmond, California, has announced that it means to go ahead with the harebrained scheme of using eminent domain to acquire mortgages on “underwater” homes at bargain prices, thereby screwing the lenders, and renegotiating loan balances with the owner/occupants of those homes. The idea is that the homeowners who signed contracts to make higher monthly payments would now be able to pay lower ones, and continue in lawful occupancy of those homes rather than losing them by foreclosure. That is to say that  the taking of the “underwater” mortgage and converting it into one providing for lowered loan balances negotiated after the taking, would allow the owners/borrowers to reap a windfall — i.e., their monthly payments would now be based on the new, lowered loan balance, with their [former] lender taking what these folks call a “haircut” — i.e., a screwing.

For the last few days, the internet has been full of news items dealing with that proposed scheme. But the bad news is that most people writing on that subject talk about the right to take, and don’t seem to have a clue that the would-be takers of these mortgages — actually deeds of trust; we don’t use mortgages in California — will have to pay just compensation, i.e., fair market value, not some bargain basement figure pulled out of thin air. And by California constitution and statute, you have to keep two things in mind. First, the “just compensation” called for the state constitution has to be “first” paid — in full, and up front, that is — before any taking can occur (Cal.Const. Art. I, Sec. 19). Second, by state statute, the condemnor has to pay “fair market value” which is further defined by statute as “the highest price” (not a bargain price), that a willing but unpressured buyer would voluntarily pay to and be accepted by a willing but unpressured seller on the date of value, giving due consideration to the property’s potential uses, including its highest and best (which is to say, its most profitable) use. See Cal. Code Civ. Proc. Sec. 1263.320.

We note that if this harebrained scheme comes a’cropper, as it likely will, for one reason or another, it won’t be the first time Richmond got its greedy  fingers burned playing with eminent domain abuse; see Richmond Elks Hall v. Richmond Redevelopment Agency, 561 F.2d 1327 (9th Cir. 1977), one of the leading cases in which the court took a dim view of a city trying to use its power of imminent eminent domain to blight private property, and then take it at its depressed value. Didn’t work out.

Are those folks trying it again? We don’t know for sure. But it seems clear that they intend to acquire “underwater” deeds of trust at below-market prices. So says the New York Times. Will it fly? Will  the courts go for this sort of scam? We’ll have to wait and see, but we believe that not even California courts will stand still for that. Why not? Because under our law,  if the condemnor tries to lowball too much, and makes an unreasonable pre-trial offer,  it may have to pay the condemnees’ attorneys’ and appraiser’s fees, plus other litigation expenses, on top of the “just compensation” required by the constitutions. And, of course, any diminution in value brought about by the the market’s reaction to the imminence of the condemnation, cannot be considered in determining fair market value. The property has to be valued as if unaffected by the condemnor’s plans or by any preliminary steps taken toward the condemnation. Cal. Code Civ. Proc. Sec. 1263.330.

Then there is the little matter of partial takings. No, not parts of mortgages, but rather the fact that a lot of the “underwater” deeds of trust (or mortgages) have been bundled as security for bonds, and we have trouble visualizing how a condemnor in one of these cases would (or could) pluck a specific “underwater” deed of trust from such a “bundle” and value it alone, without simultaneously lowering the value of the deeds of trust remaining in the “bundle” that forms security for the bond.  If attempted, that would likely call for severance damages payable to the bond holders for the diminution in the value of what remains of their bond(s) after the “plucking” (the partial taking of the bundle).

Thinking about some of these problems gives us a headache, and we are grateful that we are retired and can now view all that as a spectator sport.

On the other hand, if this stuff proceeds as proposed, there will be lots of work for condemnation lawyers, or worse, for big-shot Wall Street lawyers who may not really know much eminent domain law, but sure know how to litigate and swamp their opponents with paper. And they are amply financed to put up one hell of a fight.

We can’t wait.

Update. For the Los Angeles Times take on the status of  the “underwater mortgage” caper, see Alejandro Lazo, Proposals to Seize Loans Gain Traction, Aug. 7, 2013, at p. B1. In the meantime “rising [home] prices have feed many homeowners from negative equity positions” so the pool of potential customers (and victims) is shrinking.

Stay tuned.














The Grand Mortgage Condemnation Scheme Goes Down the Tubes

We are on the road, speaking at the annual ALI-CLE (formerly ALI-ABA) annual program on eminent domain, held this year in Miami Beach, so all we know is what’s on the internet, but our screen is full of dispatches that the county of San Bernardino, California, whose decision to study the subject of condemning mortgages on underwater  homes started the whole hulabaloo, has decided to cancel its involvement in that scheme, and won’t proceed with it.

More after we are able to gain proper access to this information.

And here, your faithful servant and a few other mavens, wasted man-hours this dicussing this subject at that ALI-CLE program only this morning.

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. Homeowners may find that speaking to a broker similar to this Red Deer mortgage broker may be the best option for them if they are looking into getting an underwater mortgage. This would help them to continue to afford things like homeowners’ insurance (see the best company) which will provide them with peace of mind and keep them product so they can continue to work and afford that adjusted mortgage. 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,, 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 mortgage is. When it comes to underwater mortgages your home may not have the equity credit needed, so it is important that you know what you’re looking for when it comes to understanding equity release, should you want to do so.

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. You might find that this is helped by having targeted mortgages, for instance, mortgages for medical professionals that provide services that could help with their personal housing finances. It is something that is slowly becoming common among professionals who are seeking mortgages in the hopes that they will not be tied down by other services.

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.

Those Underwater Mortgages — The Feds Strike Back

The Wall Street Journal blog reports that Rep. John Campbell (R-Cal.) is introducing legislation that, if enacted, would ban federal agencies alike Fannie Mae, Freddie Mac and the VA from buying mortgages issued in counties that use eminent domain to acquire existing but currently underwater mortgages in order to refinance them. The idea is that this would deprive the promoters of the scheme and the lenders on such mortgages of their principal market, and thus put the kibosh on the whole scheme.

We take it that a lobbying battle is about to erupt. Stay tuned.

See Alan Zibel, Eminent Domain Furor Hits Capitol Hill, WSJ Blog, September 13, 2012 –

Related item. If you aren’t tired of this subject or if you need a good summary of this scheme, check out an article in the Los Angeles Daily News – go to

Condemnation of Underwater Mortgages (Cont’d.)

The avalanche of news stories (newsmagazines are increasingly getting into the act) continues unabated. We make no attempt to inventory, much less comment on them. But it seems proper to take note of the fact that much of this outpouring comes from people who obviously don’t know what they are talking about. So we offer these caveats for our readers.

First, eminent domain can be used to acquire all species of private property, not just land.

Second, when property is taken by eminent domain, the condemnor does not get to set the price unilaterally. The owners who are dissatisfied with a condemnor’s offer or deposit, can litigate over value, and can put on testimony by their own appraisers.

Third, in most states, value is determined by a jury (except in New York, Connecticut and Rhode Island). In some states there is an intermediate step in the process of valuation: before going to court the valuation evidence of both parties is heard by “Commissioners,” lay individuals selected for the job. In federal law, there is no right to a jury, but under Federal Rule of Civil Procedure 71A, valuation cases are usually tried to juries, although federal judges can appoint Commissioners instead. In Florida, that practice has been frequently abused by federal judges — which is another story, too complicated to go into here. But if you want to know, check out the Formatora case decided by the 5th Circuit.

Fourth, in the proposed takings of “underwater” mortgages, the right to take can probably be established under existing federal constitutional law, but query whether states will go along with it. A definite maybe, because among other things, a number of states have modified their law after Kelo to limit the exercise of eminent domain when it is sought to be used to transfer private property from one private owner to another.

Fifth, the big problem is how to value those mortgages, and here is where it gets complicated, because the people behind this caper want to pick low-hanging fruit by condemning only those “underwater” mortgages that are current — i.e., those where the homeowners-borrowers are continuing to make regular payments on their loans. This process is vastly different in the United States, and loans in Sweden or similar countries, while still defaulted on, have a much lower rate due to the more stringent requirements imposed upon borrowers. Obviously, mortgages like that are more valuable than those in which the borrowers have defaulted. Also, if a particular mortgage has been “bundled” with others and put up as security for a mortgage-backed bond, the problems multiply, because it seems clear that the bondholders will claim [severance] damages to their remaining property, i.e., the uncondemned, remaining mortgages in the “bundle.” See United States Trust v. New Jersey.

Last, some of the reporters and on-line posters do not understand the difference between San Bernardino County (which is behind this caper) and the City of San Bernardino which is in bankruptcy.

These observations are not intended, and cannot in this limited space, give a detailed picture of what this caper portends. So if you want to be informed, be careful about what you read in the papers, as the old expression goes, and take the time and effort to inform yourself.

Follow up. We just came across a not-so-old news item reporting that 9 out of 10 home mortgages are held or insured by federal government entities, most of them by Fannie and Freddie. Roger Lowenstein, Cracked Foundation, N.Y. Times, April 25, 2010, at p. 11. Good luck on a one-horse county’s attempt to condemn those!