Growing interest in the use of eminent domain to assist underwater homeowners

UnderwaterAs interest increases to use eminent domain to assist underwater homeowners, there is opposition in Maryland.

Eminent domain has not received as much attention since the controversial decision in the 2005 case Kelo v. City of New London.  However, the issue could become a hotly debated topic in the current session of the Maryland General Assembly, since the introduction of HB1365/SB850 Real Property – Prohibition on Acquiring Mortgages or Deeds of Trust by Condemnation on February 7th; the bills propose the prohibition of acquiring mortgages through eminent domain, stating, “The use of eminent domain to acquire mortgages undermines the sanctity of the contractual relationship between a borrower and a creditor.”

The issue of using eminent domain as a vehicle to restructure underwater mortgages became a national conversation in 2012, when a few municipalities began the discussion as a means to assist underwater homeowners.  The plan caught the attention of Baltimore officials, who began a discussion last year of doing something similar.

As the housing market slowly recovers, many homeowners are emerging from a negative equity position on their homes.  According to the Zillow Negative Equity Report (zillow.com), the national negative equity rate for homeowners with a mortgage dropped to 21% during Q3 2013 (from a peak of 31.4% during Q1 2012); while 14.7% of homeowners who own their home free and clear are underwater.  Regional statistics vary depending on the strength of the local markets compared to peak home values.

The Baltimore Sun reports that about 13% of mortgages in the Baltimore-Towson area are underwater; neighborhood percentages vary, and there some with significantly more underwater homeowners (Some call on city to explore eminent domain to combat blight; Program targets underwater mortgages, By Natalie Sherman; The Baltimore Sun; November 25, 2013).

A recent industry article looks at the back story and status such plans, as well as discussing some practical considerations.  The article asserts that the concept is “far from dead,” stating that “…Local government and community leaders have legitimate concerns about their constituents, many of whom are struggling with mortgage payments on inflated loans that have made their homes unaffordable, and nearly impossible for them to sell without sufficient equity to pay off the loans…”  However, the conclusion states that such a plan at present “…appears wrought with complications and does not appear likely to lead to any significant chance of furthering its stated “public” purpose-economic development…”   The result may be “lengthy and expensive legal battles; and possible disruptions or changes to the credit industry, which decrease access to mortgages and/or increase interest rates (Dellapelle & Kestner (2013). Underwater mortgages: Can eminent domain bail them out? Real Estate Issues, 38(2), 42-47).

In response to the effort to implement eminent domain in such a way, the Federal Housing Finance Agency (FHFA.gov), the regulator and conservator of Fannie Mae and Freddie Mac as well as the regulator of the Federal Home Loan Banks asked for public input; and subsequently issued a General Counsel Memorandum on August 7th 2013:

The General Counsel Memorandum was a summary and analysis of the public comments and input regarding the use of eminent domain to restructure mortgages.  The memo discussed a number of legal issues as well as issues that relate to the FHFA.  The memo stated the pros and cons of such a plan too: Proponents claimed “…if securities have lost value, then the proper and fair valuation of mortgages backing the securities through eminent domain results in no loss to a securities investor, but permits a restructuring of a loan that would benefit homeowners and stabilize housing values…” while opponents point to “…numerous legal problems with the proposed use of eminent domain; some centered on the proper use of eminent domain itself and others on attendant constitutional issues related to taking of property or sanctity of contract. Opponents noted strong reaction of financial markets that support home financing in terms of upsetting existing contracts but as well creating an unworkable situation for providing and pricing capital based on the uncertainty of such a use of eminent domain…”  However, the conclusion states, “…there is a rational basis to conclude that the use of eminent domain by localities to restructure loans for borrowers that are “underwater” on their mortgages presents a clear threat to the safe and sound operations of Fannie Mae, Freddie Mac and the Federal Home Loan Banks as provided in federal law…”  

by Dan Krell
© 2014

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

A new wrinkle for eminent domain

Dan Krell, Realtor®
DanKrell.com
© 2012

eminent domainWhen the housing market began its decent in 2007, foreclosures seemed to occur with the frequency not seen since the S&L crisis of the late 1980’s. Since then, negotiating a lower mortgage payment by modifying the mortgage interest rate and/or reducing the principal continues to be difficult for many home owners.

One of the reasons why modifying a mortgage can be difficult is because of the complicated structure of the Real Estate Mortgage Investment Conduits (REMIC). A REMIC, is a financial instrument that may have stimulated the wide use of “100% financing” and other high risk mortgages through securitization of mortgages on the secondary market. Although a highly complex structure, a very basic explanation is that the REMIC purchases large pools of mortgages and acts as the trustee for those who own the bonds to which the loans are securitized (mortgage backed securities). Bond holders could be individuals or corporations that may also sell ownership to the bonds as well (e.g., funds, annuities, pension plans). Mortgage modifications in the REMIC environment can be legally complex. Additionally, the inherent complex structure of the REMIC as well as its fiduciary responsibility to its bond holders, makes decisions move at a snail’s pace.

In an effort to assist home owners in their local communities, a few municipalities (most notably San Bernardino County) have considered restructuring mortgages via eminent domain. Eminent domain is the power that government exercises to take private property for public use and pay the owner a “just compensation.” And although eminent domain cases typically involve real property (e.g., land), it may also involve other types of personal property.

Considering that eminent domain is often a contentious topic, you might imagine that there might be some resistance to the condemnation of mortgages by municipalities. The Federal Housing Finance Agency (the FHFA oversees Fannie Mae and Freddie Mac) entered a note in the Federal Register on August 9th (“Use of Eminent Domain To Restructure Performing Loans”). The note listed concerns for such practice of eminent domain, among which is a concern that tax payers could ultimately bear the losses incurred from restructuring mortgages through eminent domain. As a result, the FHFA may take action to “avoid a risk to safe and sound operations and to avoid taxpayer expense.”

eminent domainThe Wall Street Journal reported on August 8th (“New Roadblock for Eminent Domain Bid: Housing Regulator”; by Al Yoon) that banking and other related groups are concerned that “stripping loans from investors would create unnecessary losses and reduce the availability of credit.” And, “… the Securities Industry and Financial Markets Association, or Sifma, has proposed prohibiting loans originated in areas using eminent domain from a key part of the $5 trillion mortgage-backed securities market that is a backbone for U.S. housing finance.”

An article by Rep Brad Miller published in the American Banker on July 11th (No Wonder Eminent Domain Mortgage Seizures Scare Wall Street) discussed the impact of eminent domain of mortgages on Wall Street, specifically the four largest banks. Congressman Miller pointed out that there is a cost to lenders holding second mortgages when mortgages are restructured. In particular, the four largest banks, which “hold $363 billion in second liens, very commonly on the same property as first mortgages they service.”

Regardless of the outcome, there is sure to be plenty of posturing; the result may add a new wrinkle in the eminent domain debate.

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This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of August 13 , 2012. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.

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The Gambit of Eminent Domain

Many contend that the use of eminent domain is increasingly abusive, as highlighted by the case of Kelo v. New London. If you recall, Kelo v. New London involved the taking a private land to be used by developers to revitalize a Connecticut waterfront into upscale homes, a commercial district, and a large (private) research campus. The case was fought through the court system all the way up to the Supreme Court of the United States (SCOTUS). In 2005, the SCOTUS ruled 5-4 in favor of the municipality, New London, CT, with the majority accepting an expanded interpretation of “public use.”

Eminent Domain is a common law process that allows the government (local or federal) to take real property without the owner’s permission. The right of eminent domain is given to governments by the United States Constitution, as specified in the Fifth Amendment. Typically, land that is taken is used for public roads (battles over the ICC are still fresh in our memories), public schools, public utilities, and other public uses. Generally, if the land owner refuses the initial offer for their property, the government initiates condemnation proceedings to take control of the land.

Since the case of Kelo v. New London, similar cases have emerged up across the country. Two high profile cases in New York are being fought and again raising the question about eminent domain abuse.

A case ruling in favor of the State involves the development of a Brooklyn neighborhood into “Atlantic Yards” (Atlantic Yards is to include commercial and residential development, including the Barclays Center- where the New Jersey Nets will call home). Property owners who fought the condemnation of their property for the development of Atlantic Yards were thrown a major obstacle in their fight when they learned that the New York Court of Appeals upheld the condemnation. Additional appeals are probable.

The other case concerns the expansion of Columbia University in New York City. The university’s expansion rests upon the ability to purchase property and land in specific neighborhoods that they feel is appropriate for their needs. When several property owners refused to sell to the university, the State stepped in to condemn the property to force them to sell. Recently, a New York State appellate court ruled against the State (of New York) which possibly characterizes the abuse of eminent domain by abetting Columbia University in acquiring land that was ruled to have no public purpose.

A recent local case of eminent domain has some raising their eye brows as well. Earlier this year, Governor O’Malley asserted the use of eminent domain to save the Preakness Stakes by attempting to force Magna Entertainment to sell Pimlico, Laurel and Bowie race tracks to the State. Questions whether this use of eminent domain is in the spirit of the Constitution may be moot as the race tracks may be sold to other local interested parties.

Eminent domain continues to be a complex and deeply debated issue. If eminent domain’s expanded definition is to allow commercial development for the public good, then consider a recent Wall Street Journal report (November 11, 2009; “Pfizer and Kelo’s Ghost Town”): The local and state government spent $78 Million to raze the Kelo neighborhood, only to find out that developers pulled out. The land is now vacant and without any tax benefit.

This article is not intended to provide nor should it be relied upon for legal and financial advice.  Permission to use this article is by written consent only.

by Dan Krell ©2009