San Bernardino County Considering Unprecedented Use of Eminent Domain
San Bernardino County is considering solving its residents’ real estate woes by asserting its power of eminent domain to take distressed mortgages for the purpose of preventing foreclosures. Such action would be unprecedented. And the controversial idea is eliciting scrutiny and strong negative reactions from many in the real estate and financial industries, who have expressed early concern about the potential ripple effects of such action – like losses for 401(k) and pension plans invested the securities and higher borrowing costs for new homeowners – and its questionable legality, fairness, and probable effectiveness. The proposal has been less than kindly described by some as a “politically wired money grab.”
A San Francisco based firm known as “Mortgage Resolution Partners,” who apparently stands to benefit from purchasing deeply discounted interests seized, began engaging the County in closed-door discussions about the concept in January of this year. The County (as well as several other counties and municipalities) entered into a non-disclosure agreement with the firm which kept things under wraps until the news outlets recently obtained documents evidencing the discussions. (Read more here.)
An initial critique of the proposed action has been produced by the American Securitization Forum, which argues, among other things, that the use of eminent domain would fail to satisfy the requirement of our Article I, Section 19 of the California Constitution and the Fifth Amendment of the U.S. Constitution that a taking be for a “public use,” notwithstanding the U.S. Supreme Court’s 2005 decision in Kelo v. City of New London.
Robert Hockett, a professor at Cornell Law School and Fellow at the Century Foundation, supplied the blueprint for and legal argument in support of the plan the County is now considering in his memorandum “Breaking the Mortgage Debt Impasse: Municipal Condemnation Proceedings and Public/Private Partnerships for Mortgage Loan Modification, Value Preservation, and Local Economic Recovery.” Professor Hockett concludes that because there are a large number of dispersed parties involved in the ongoing “foreclosure crisis,” it is necessary for local government “to sidestep all of the unnecessary impediments that presently block meaningful debt revaluation and attendant value maximization.” (See page 28; his italics.) (His elevator pitch can be found here.)