California Cities to Implement Controversial Eminent Domain Solution for Underwater Mortgages

Should eminent domain be used to help cure the mortgage crisis in California?

San Bernardino, a city that just filed bankruptcy and one of the hardest hit areas when it comes to underwater mortgages is the inland area of California, is considering a plan that will help people who now owe more money on their house than what it’s worth, but the plan is not without its controversy.

Along with the surrounding cities of Ontario and Fontana, officials in this region are trying to stem the housing crisis by using the power of eminent domain. In short, what would happen with this plan is that the local government would seize the homes that are affected by the underwater mortgages. The government would then condemn these mortgages which would allow them to be seized from investors that have purchased them. This would make it much easier to rewrite the mortgage loans so the borrowers could lower their monthly payments.

Eminent domain is a law that is typically reserved for clearing land for new infrastructures. If the government wants to build new roadways, utility poles, gas lines or any other infrastructure and there is private property that is standing in the way, the owner can have their land taken through a court order. However, they must be given the current fair market value of their land at the time the government decides to seize the property. When this happens, it’s called “condemnation” proceedings.

With the new plan being discussed in San Bernardino and surrounding cities does not involve building infrastructure, officials say they can use the idea of eminent domain to condemn these mortgages because it is in the best interest of the public. Since the housing crisis has been so detrimental to the economy in this area of California, rewriting the mortgages and offering lower monthly payments to the borrowers will be a huge step in improving the local economy, according to those who are touting the plan’s positive impact.

If the plan goes into effect, it will focus on those mortgages in which the borrower is current on their payments but they owe more money on their home than its actual value. The mortgages for these homes would be “condemned” and the new loans would be written using the home’s current value rather than its value when it was purchased years ago. This would inevitably lead to a lower loan amount which would result in lower payments.

Some officials, however, aren’t sure that this is such a great idea. Although it will make mortgage borrowers and private investors happy, it could make banks hesitant to offer new mortgages in the area. Others say that the plan would result in “costly litigation” as some private investors who invested in mortgage securities will lose money on the deal. It will also discourage new investors from putting their money into fragile housing markets where it is needed the most.

If this plan works, do you think it will spread to other areas of the country where the housing market has been hit hard? Is it a good plan or will it create more problems than it solves?

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