Eminent Domain and Mortgages

Bob Shiller, in a recent New York Times column, discussed a novel approach to dealing with under-water mortgages. As suggested by Robert Hockett of Cornell University Law School, a local government could seize under-water mortgages through its power of eminent domain, compensate the mortgage owners and then re-issue new mortgages to home owners with principal amounts and interest rates that reflect current house values and market conditions.  Lenders or investors who owned the original mortgages would be compensated through the courts based on the current value of the mortgage, probably less than the original face value. Homeowners would be offered a new mortgage based on the compensation paid for the old mortgage and the current value of the home. The new mortgage would not be under water. Further, since the new mortgage would bear a reasonable relation to the current value of the house and since the homeowners had demonstrated their ability to make mortgage payments by not defaulting, the new mortgages could be sold to investors.   All this sounds creative, and may be possible: the Wall Street Journal reports that a group in California is preparing to carry this idea forward in San bernadino County.

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