If you thought Kelo was bad...

[MadImmortalMan]

Cities Consider Seizing Mortgages

    A handful of local officials in California who say the housing bust is a public blight on their cities may invoke their eminent-domain powers to restructure mortgages as a way to help some borrowers who owe more than their homes are worth.

    Investors holding the current mortgages predict the move will backfire by driving up borrowing costs and further depress property values. "I don't see how you could find it anything other than appalling," said Scott Simon, a managing director at Pacific Investment Management Co., or Pimco, a unit of Allianz SE.

    Eminent domain allows a government to forcibly acquire property that is then reused in a way considered good for the public--new housing, roads, shopping centers and the like. Owners of the properties are entitled to compensation, which is usually determined by a court.

    But instead of tearing down property, California's San Bernardino County and two of its largest cities, Ontario and Fontana, want to put eminent domain to a highly unorthodox use to keep people in their homes.

    The municipalities, about 45 minutes east of Los Angeles, would acquire underwater mortgages from investors and cut the loan principal to match the current property value. Then, they would resell the reduced mortgages to new investors.


    The seizure of home-mortgage liens, but not the underlying homes, hasn't ever been conducted through eminent domain, as far as the group's principals can tell. And while they believe they have a strong legal case, they expect loan owners to sue.

    "California legal precedent and political posture favor the program and constitute an ideal proving ground," Mortgage Resolution Partners said in a presentation to investors reviewed by The Wall Street Journal.

    The document said it would begin with a $5 billion effort in California that could grow to three million mortgages as part of a $500 billion multistate effort.

You think the impact would be more than the resulting legal bills?   

[dps]

You think the impact would be more than the resulting legal bills?   

Under Kelo, this would probably be legal.  But I can't see how it would be a good idea in any way.  It would probably be cheaper for the state to just pay off part of a homeowner's mortgage for them.

[Admiral Yi]

Agree that Mortgage Resolution Partners seem to have invented a nice money-making scam.

Kelo would allow confiscation of the properties, but I don't see how it would allow confiscation of the mortgages.

[dps]

Agree that Mortgage Resolution Partners seem to have invented a nice money-making scam.

Kelo would allow confiscation of the properties, but I don't see how it would allow confiscation of the mortgages.

Mortgages are property.  They, in and of themselves, are not real property, so I guess the constitutional question would be if eminent domain can be applies to property that is not real property.  I'm not aware of a Supreme Court ruling on that point.  I do remember that back when Al Davis moved the Raiders to L.A., at one point the city of Oakland unsuccessfully tried to seize the team under eminent domain, but I don't recall just why the effort failed--not sure if it was ruled out by the courts because of constitutional concerns or if there were other factors at work. 

[grumbler]

Agree that Mortgage Resolution Partners seem to have invented a nice money-making scam.

Kelo would allow confiscation of the properties, but I don't see how it would allow confiscation of the mortgages.

I'm with you on both points.  If California seizes the land under eminent domain, they need pay merely fair market value.  That doesn't mean that the mortgage is invalid, it just means the the mortgagee would only be able to pay the amount the state offered in a sort of forced short sale.  Could make for some interesting court cases. 

If the cities actually acquire the mortgages themselves under eminent domain, then the fair market value of the mortgages would be the face value, I would think.

[stjaba]

Mortgages are property.  They, in and of themselves, are not real property, so I guess the constitutional question would be if eminent domain can be applies to property that is not real property.  I'm not aware of a Supreme Court ruling on that point.  I do remember that back when Al Davis moved the Raiders to L.A., at one point the city of Oakland unsuccessfully tried to seize the team under eminent domain, but I don't recall just why the effort failed--not sure if it was ruled out by the courts because of constitutional concerns or if there were other factors at work.

A quick non-scholarly google search indicates that intangible property can be seized via eminent domain. I imagine the actual case law on the issue would be interesting.