The latest developments in the fight over the use of eminent domain to seize underwater mortgages in California and elsewhere have important implications for lenders nationwide.
The debate over the use of eminent domain for this purpose stems from plans raised by some municipalities to take title to underwater mortgages secured by real property within their jurisdictions and to pay the mortgage holders “fair market value” as the just compensation required by the Fifth Amendment of the U.S. Constitution. Municipalities and private investors would then issue new mortgages to the homeowners and write down the principal balance of their loan. This would serve the dual goals of allowing the homeowners to build equity and reduce their monthly payments, and hopefully restoring some vitality to the local housing market. The restructured mortgages would then be sold to third-party investors.
Unsurprisingly, the mortgage lender community has been outraged by these proposals, and numerous market participants and observers have called for restraint and thorough consideration of the likely consequences before any program is put in place. Recently, some new voices have joined the chorus on both sides of the proposals.
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