As a way to help underwater homeowners, local officials in California's San Bernardino County and two cities, Ontario and Fontana, proposed using the power of eminent domain to restructure underwater mortgages. However, the idea was scrapped after the public showed little support and Wall Street groups opposed the plan.
Your mortgage is underwater if you owe more to your lender than your home is worth. For example, if your mortgage is $300,000 and your home is worth only $250,000, your home is underwater.
If you are a homeowner with an underwater mortgage, you may face the following problems.
All of these problems increase the risk of foreclosure.(To learn more, see Nolo's article What Is an Underwater Mortgage?)
Under the power of eminent domain, the government may forcibly take private property so long as it is used in a way that is beneficial for the public. For example, property that is acquired by eminent domain is typically used for new roads, schools, parks, and the like. If a property is taken by eminent domain, the owner is entitled to the fair market value in compensation.
Under the plans proposed by San Bernardino County and the cities of Ontario and Fontana were implemented, the municipalities would have used eminent domain to:
Example. Let’s say that a homeowner paid $400,000 for her home and financed the entire amount. As a result of the economic crisis, that home is now only worth $250,000. The municipality could take the property using eminent domain by paying the note holder $250,000. The reduced loan would then be sold to a new investor and the homeowner would end up with a lower mortgage payment and a new loan servicer.
Criteria. Borrowers would be required to be current on their mortgage payments and the program would first concentrate on helping those borrowers whose mortgage is not federally guaranteed.
The eminent domain plans had proponents and critics.
The pros to using eminent domain in this manner. Backers of this proposal said it would help borrowers get out of suffocating debt, which in turn would help the overall economy, as well as prevent foreclosures.
The downside of using eminent domain in this manner. On the other side of the coin, lenders claimed that using the power of eminent domain to help borrowers who owe more than their homes are worth only increases the cost of borrowing and further depress property values. Lenders also assert that it would be an illegal use of eminent domain.
Ultimately, the idea was scrapped after the public showed little support and Wall Street groups opposed the plan.
Whether any proposal to use eminent domain to assist homeowners with underwater mortgages will ever be implemented is yet to be seen. What we do know is that housing prices may take years to recover and underwater mortgages are likely to be an issue for the foreseeable future.