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Somin Comments on Plan to Seize Mortgages Using Eminent Domain

A controversial plan in Richmond, California, to seize mortgages for financially distressed properties using the legal process of eminent domain is “likely to be permissible” after the Kelo case, says Professor Ilya Somin in an abcNEWS article, but under-compensation will be a “possible constitutional problem.”

Richmond's mayor, Gayle McLaughlin called on banks to "do the right thing and sell us the loans at fair market value, so that we can do what they have not: fix these troubled loans so that more of our families here in Richmond can stay in their homes and our neighborhoods and local economy can recover.”

But critics of the plan, such as the Securities Industry and Financial Markets Association, warn that the city's actions may “hurt many more homeowners both within the city and around the country than it is alleged to help” by increasing borrowing costs and possibly restricting credit availability for home buyers.

Richmond, Calif. Eminent Domain Proponents, Critics: Q&A, abcNEWS, August 2, 2013. By Susanna Kim. 

Excerpt:
"This week, Mayor McLaughlin sent letters to trustees of 626 underwater mortgage loans. The city had the loans appraised by Mortgage Industry Advisory Corporation on June 30 to determine their fair market value and offered to purchase the loans. She asked the owners and servicers of these loans to respond by Aug. 13.

"An example in the New York Times provides a hypothetical example in which a home mortgaged for $400,000 is now worth $200,000:

"'The city plans to buy the loan for $160,000, or about 80 percent of the value of the home, a discount that factors in the risk of default.'

"'Then, the city would write down the debt to $190,000 and allow the homeowner to refinance at the new amount, probably through a government program. The $30,000 difference goes to the city, the investors who put up the money to buy the loan, closing costs and M.R.P. The homeowner would go from owing twice what the home is worth to having $10,000 in equity.'

"Williams said the city is buying a loan, not any part of a security.

“'The city is buying the loan from the trust, not anything from any holder of securities,' he told ABC News. 'The trust holds a diversified portfolio of loans, and the sale of one loan, such as a loan in Richmond, does not in any way degrade the value of any other loan that the trust holds, such as a loan to a borrower in Chicago.'”

Read the article