Here's One Way to Resolve Housing Mess, But Is It Legal?

Imagine if you told your mortgage had been seized by the county in you live.

You have been paying this mortgage, but you owe more than your home is currently . if you were then told that the size of your mortgage had been reduced that current value, so your monthly payments are lower.

Jackpot! Right?

That’s just could happen, as county officials in San Bernardino County, California Friday looked the possibility of using the powers of eminent domain seize underwater mortgages and cut principal balances.

Some legal experts say is possible, but it will surely contested.

It is unprecedented use of eminent domain, but are unprecedented times the housing and mortgage markets. Governments usually use eminent domain take property from a private in order to turn it around and build something useful the public good.
It has been used to get of neighborhood blight.

Still, the government must pay the owner value, and that’s where all this tricky, because home values now affect more than just the homeowner. They are the foundation of billions of dollars’ of mortgage-backed securities. Remember, that’s how we got in in the first .

The mechanics are tricky as . The plan is backed by a San Francisco- venture capital firm, Mortgage Resolution Partners, would stand to profit from buying and reselling these loans. It would money first to pay off the original owners of the loans, private label investors, the reduced amount (the fair market value determined a judge).

The arguments are vast and varied for and . An op-ed in the Wall Street Journal opposing it:

In instance, the government has every economic incentive to underpay the investor owns the mortgage to cover transaction costs and boost returns itself and MRP. Even worse in this , the government would be grabbing mortgages which the homeowner is still paying the monthly , not mortgages that are in or close to it. It's an arbitrary seizure.

It also argues this would put question the values of all home loans, could hurt home prices and keep private investors returning to the mortgage market (not that they’re coming in droves now as it is).

Joe Nocera in the New York Times supporting it:

It would be a way break the logjam that keeps mortgages mortgage-backed bonds — securitizations — from modified. It could prevent foreclosures. And it could finally stabilize housing prices.

Borrowers would have to be current their mortgage payments to be eligible this, so it wouldn’t help cure any the already delinquent loans.

The idea is if this worked in San Bernardino, it could nationwide. As the idea develops, the only thing we can know for is that this case will end up court before anyone seizes anyone else’s home .


Adapted from: CNBC, July 13, 2012.