Issue of the week: Eminent domain to help homeowners

This could be a “game-changer for the housing market,” said Jordan Weissmann in TheAtlantic.com. Officials in California’s San Bernardino County, where half the homes are worth less than their mortgages, are considering a radical proposal: using their power of eminent domain, typically invoked to clear property for highways or schools, to relieve underwater homeowners. Under the plan, local governments would buy mortgages from lenders and investors at a discounted, but fair, market rate. They’d then give homeowners smaller mortgages that reflect a home’s current value. The whole scheme, run by a private company for a fee, would be funded with money from new investors, so taxpayers wouldn’t be at risk.

The approach would solve housing’s paralyzing “collective action problem,” said Robert Hockett in Reuters.com. Everyone knows we need to write down mortgages to heal the housing market, but no one will make the first move. Mortgage-backed bonds have been so sliced, diced, and bundled that investors “cannot even find one another,” much less agree on how to cut homeowners a break. That’s why local governments have to jump-start the process.

What a bad idea, said The Wall Street Journal in an editorial. This constitutionally dubious scheme would make a mockery of established contracts, let alone that little “detail known as property rights.” The government would essentially seize mortgage bonds from investors and set new prices as it saw fit. Such a “drastic step” would send “shock waves through the market,” said the Los Angeles Times. Current bondholders would be spooked, “drying up the supply of money for new mortgages,” and lawsuits would abound. It also bears asking, since city governments and new investors stand to profit, how it’s appropriate to use a drastic measure like eminent domain to create profits for one group “at the apparent expense” of others.

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I’ll admit the idea “sounds a little crazy,” said Joe Nocera in The New York Times. “But the more closely you look at it, the more sense it starts to make.” There’s no question that fixing housing is in the public’s interest, and with 12 million homes underwater, it’s time to relieve homeowners of “unrealistically high” mortgages and help them start spending again for the sake of the economy. This country has suffered through four years of a devastating housing crisis, and nothing has yet worked to halt the foreclosure tide. With so few workable options, “it’s time to give eminent domain a try.”