If you haven’t heard, the latest “brilliant” (feel the sarcasm) plan proposed by some state officials is for their counties to “take” homes that are in imminent danger of foreclosing. This would be done under the government’s powers of eminent domain.
Eminent domain literally translates as the taking of private property for public use. It allows the government (federal and state, as well as local authorities in many states) to seize your home in order to build things like railroads, utilities, highways or bridges, and is supported under the 5th Amendment. There must be a “public use” involved, and the taking must be accompanied by “just compensation.” It is a rarely used power, and in my lifetime I have seen it used only once. But now officials are simply going too far in trying to apply the rights of eminent domain to prevent foreclosures.
To be fair, the arguments FOR this crazy idea are that such actions will help homeowners and prevent neighborhood blight. Ok, so maybe some homeowners will be “helped” by getting out of a mortgages that are sinking them, but there are other ways to do so – loan modification, short sale, and possibly the new rent back programs some lenders are embracing. Other than that, I do not see how eminent domain will help our housing situation in the slightest, nor should it. Here is why:
1. Definition. Eminent domain does not require the owner’s consent, but does offer monetary compensation. This action is also allowed to be delegated to third parties who will take the property and devote it to public or civic use. The question in taking people’s homes is whether doing so will fit within the definition.
The counties that are proposing using eminent domain (like San Bernadino County in California) to help underwater borrowers would like to delegate the taking to third parties. These parties will likely be private lenders or others who will take over the debt, pay it off, and then put the property to “public” use. What I don’t understand is specifically how they might do this. For example, if there are properties in a residential neighborhood that qualify, it’s not like they can just take the homes and turn them into railroads or highways. There are all kinds of challenges in such situations, not to mention zoning codes. So realistically there are many neighborhoods (I would think the majority of them) that may not truly fit within the definition. We would have to learn more details to fully understand this one.
2. Lawsuits. There is most always a lawsuit with eminent domain – not many property owners are going to peacefully walk away and let the government take their home. If this is to be done on a large scale, it will further congest our overburdened court systems, costing lots of money and time – more for the taxpayers to dish out. The only ones who stand to benefit here are the lawyers.
3. Too much power. Obviously this is a situation subject to LOTS of abuse. And with abuse of power comes more lawsuits, uprisings, and people just plain fed up with the government. Can we really stand for more of that? Not to mention, letting the government become involved in private contracts (a mortgage is a private contract between a homeowner and the lender) creates a plethora of issues.
4. The compensation issue. Under eminent domain statutes the government must pay compensation to the property owner upon the taking of the property. Usually this means the owner will get fair market value. However, in cases where there are loans on the property in excess of fair market value, what will happen? Are we to assume the homeowner will walk away with nothing? We need more information here, but I honestly don’t see how this one will play out. Another point is that the “fair value” will rely on appraisals – what if they are incorrect?
Plain and simple, using eminent domain to “take” homes in order to help the housing problems is a bad idea. Until we get to work by really helping those who qualify for loan modifications, short selling the homes of those who do not, and selling the shadow inventory, along with other possible ideas (like changing the bankruptcy laws so mortgages are treated like other forms of debt), we will continue to see more bad ideas like this one spring up.