The Government’s Power to Seize Your… Mortgage?

Many of you have probably been following the eminent domain mortgage seizure program proposed in San Bernardino County recently. If not, read more here. Mortgage Resolution Partners has proposed that the City use eminent domain to seize underwater mortgages. According to the San Berndardino Sun, “the loans would then be modified to current market value so people could afford their monthly mortgage payments and establish equity. The loans would then be sold to hedge funds, pension funds or other investors, with the proceeds being used to pay off outside financiers, secured by MRP, who are funding the eminent domain process. MRP would take a $4,500 fee for each loan seized and modified, and the original bondholder would be left eating the difference between what was owed on the original mortgage and the renegotiated loan at current market value. The county would retain the mortgage notes.”

This certainly seems like a drastic measure, but the proposal is designed to assist the 150,000 residents of the county who currently owe more on their house than it is worth. Eminent domain refers to the power of the government to seize private property for a public use. The SB sun reports that using the power to seize a loan is unheard of, and that the federal government has threatened to redline cities and counties that engage in the behavior out of fear that it will make it harder to get loans and force lenders to raise fees to protect themselves in the event of a government seizure.

Other cities are considering similar measures, including Brockton, Massachusetts. According to Boston.com, the City Council’s finance committee recently formed a study group to look into the use of eminent domain to seize bad mortgage loans. The article reports that “In 2010, the city has 422 foreclosure deeds filed, and 766 orders of notice issued. In 2011, those numbers fell to 281 foreclosure deeds filed and 500 notices issued, and last year, there were 266 foreclosure deeds filed and 489 notices issued.” The study group is charged with exploring the legal ramifications of the seizure and coordinating who would run the program. More information is available here.