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The Premise
Since June 2012, there have been numerous articles, editorials and other writings concerning the use of eminent domain as a tool to allow local governments to seize control of their local housing problem and end the blight of foreclosures. The premise is that government entities can use their power of eminent domain to seize the mortgages (or deeds of trust) and their corresponding promissory notes from the lenders rather than taking the homes from the homeowners, thereafter redoing the notes and mortgages in order to keep the homeowners in their homes.
The housing crisis is characterized by four broad conditions, i.e., market segments: homes that are underwater (homeowner owes more than the home is worth) but where the homeowner is current on payments, underwater mortgages where the homeowner is in default, homes where lenders have initiated foreclosure proceedings, and those that have been foreclosed and now stand empty and unproductive. Local governments can use eminent domain to deal with any of those conditions.
The recent spate of articles has centered around just one application of eminent domain - where the homeowner is current on payments but owes more than the home is worth. As a group, these owners have a high probability of winding up in foreclosure, thus the attention to prevention. We list a representative selection of articles for and against this application below (please keep in mind that they provide a spectrum of opinions related to this single application of eminent domain only).
Our book Eminent Domain: How to use eminent domain to stop foreclosures, rescue homeowners and save communities (available here) focuses on a different group of homeowners - those facing immediate foreclosure. As writings on that concept are published, we will add them to list.
Articles Introducing & Supporting The Concept
Cornell Law Professor Robert Hockett provides a good overview of the concept, discusses how several local governments in California are exploring adoption of a plan to deal with underwater mortgages, and introduces a number of key advocates. "A solution for underwater mortgages: Eminent domain," Reuters, 6/19/12.
Prof. Hockett also wrote a 55-page in-depth analysis of the legal and financial rationale behind the plan titled "“Breaking the Mortgage Debt Impasse: Municipal Condemnation Proceedings and Public/Private Partnerships for Mortgage Loan Modification, Value Preservation, and Local Economic Recovery,” 4/21/12.
The Reuters article was followed by this one authored by Yale economist Robert Shiller, in which he argues for the need for a collective solution to the housing crisis and endorses Prof. Hockett's strategy as a viable solution. "Reviving Real Estate Requires Collective Action," New York Times, 6/23/12.
New York Times Op-Ed Columnist Joe Nocera followed with a piece titled "Housing’s Last Chance?" Nocera concluded his support of Hockett's plan with this statement. "We’re four years into a housing crisis. Nothing has yet worked to stem the terrible tide of foreclosures. It’s time to give eminent domain a try." New York Times 7/9/12.
These three articles and several others produced a flood of opposing articles. The bulk of the objections have come from Wall Street financial interests and their supporters. That led to an article by Congressman Brad Miller from North Carolina: "No Wonder Eminent Domain Mortgage Seizures Scare Wall Street." American Banker, 7/11/12.
That article was followed by this one from Wall Street crusader Matt Taibbi of Rolllingstone "From an Unlikely Source, a Serious Challenge to Wall Street", Rollingstone Taibblog, 7.20.2012
This article by Brooklyn Law School professor David Reiss "Eminently reasonable: Using the power of eminent domain to restructure underwater mortgages is constitutional, beneficial and administratively feasible" was published in the National Law Journal, 9.24.2012
Videos explaining the concept
Bloomberg Law’s Lee Pacchia interviews Cornell Law Professor Robert Hockett and Attorney Richard Leland partner at Fried, Frank, Harris, Shriver & Jacobson LLP "Can Cities Use Eminent Domain To Seize Mortgage Loans?", 7.19.2012
Yahoo Finance's Aaron Task interviews Steve Gluckstern, chairman of San Francisco-based Mortgage Resolution Partners (MRP) "Eminent Domain: Can It Fix The Housing Market?" (includes an article) 7.24.2012
Articles Opposing The Concept & Rebuttals
All the arguments in the below articles opposing this idea come from Wall Street and other financial organizations with a vested interest in the status quo. None of their arguments addresses the needs of homeowners and their communities. In fact, those who are arguing the loudest are primarily those who helped cause this crisis. It leads one to the conclusion that “If Wall Street says it's a bad idea, you can count on the high probability that it's good for the rest of us!”
These two articles were representative of the initial reaction from Wall Street opposing the basic idea. “Bank, Bond Groups Join to Oppose Eminent Domain on Mortgage,” Wall Street Journal, 6/29/12 and “SIFMA Leads Industry Opposition To California Eminent-Domain Plans,” MortgageOrb.com, 6/29/12.
Those were followed by a Wall Street Journal Opinion entitled “An Eminently Bad Idea,” Wall Street Journal, 7/11/12. Prof. Hockett published a rebuttal here, 7/12/12.
The next day, the Securities Industry and Financial Markets (SIFMA) organization posted a piece titled "SIFMA - Securities Industry and Financial Markets : SIFMA Statement On the JPA’s Proposed Use of Eminent Domain to Take Mortgage Loans," 7/13/12. Their pronouncements were rebutted by Steven Gluckstern, Executive Chairman of Mortgage Resolution Partners (MRP), in "Statement in Response to SIFMA's announcement today from Steven Gluckstern, Executive Chairman, MR," 7/13/12.
On the same day as the SIFMA article, the American Securitization Forum (ASF) issued a threatening letter to San Bernardino County Supervisors. That was immediately followed by a rebuttal by MRP entitled “Statement from MRP on ASF's Latest Threatening Letter: Shooting from the Hip on the Facts, Law, and Wise Policy,” 7/13/12.
The following day one of the country's largest law firms, Jones Day, released an article that presents a legal argument against the eminent domain concept. The article, which contains basic legal inaccuracies, can only be described as a shill for the financial industry. The article is titled “They Can’t Do That, Can They? Constitutional Limitations on the Seizure of Underwater Mortgages,” 7/14/12. The article questions the basic premise of using eminent domain to seize mortgages based on the constitutional question of violation of the Contracts Clause by the Takings Clause. Basically, the Contract Clause prohibits states from enacting any law that retroactively impairs contract rights. A number of other articles picked up that theme and repeated it.
MRP quickly posted a rebuttal titled “Of Course They Can!” 7/15/12. The article points out the legal fallacies of the Jones Day arguments, especially the violation of the Contracts Clause. They point out that the U.S. Supreme Court, in a unanimous decision (Hawaii Housing Authority v. Midkiff,) “both considered and, decisively for present purposes, unanimously rejected the argument that eminent domain takings can violate the Contract Clause. The Court explained that ‘the Contract Clause has never been thought to protect against the exercise of the power of eminent domain.’