At a press conference on the steps of City Hall, City Council members and housing advocacy groups called on the Mayor to help homeowners who are at risk of foreclosure. Such help would come in the form of using eminent domain to “buy back mortgages where homeowners owe more than their houses are worth.”
According to a CBS report on June 25, 2014, “under the proposed plan, City government would purchase the mortgages from banks and refinance them to match the home’s value to prevent foreclosure.” According to the report, 60,000 New York City mortgages are still “underwater.” Councilman Mark Levine stated:
When there is compelling public interest, the government can pay fair market value for property to another use… The city through eminent domain could pay fair market value for the property, the city could take them over and work out, refinance on the loan. That would be fair to families.
Well it was bound to happen. Sooner or later, every silly idea finds its way to the Big Apple. The idea to bail out homeowners whose mortgage debt exceeded the value of their home gained much publicity after the Mayor of Richmond, California proposed using eminent domain to cure this same problem in her city.
But the idea, although approved by the Council, has gone nowhere in Richmond. Nor has it moved forward in at least four other cities that have considered it. In an article titled, “Eminent Domain: A Long Shot Against Blight” published in the New York Times on January 11, 2014, Shaila Dewan wrote:
The eminent-domain strategy is not a fabulous idea. Like virtually every other proposal to help homeowners hurt by the housing crash, it tries for simplicity but falters in the face of the enormity of the post-financial-crisis mess, and, as markets improve, it may come too late to make much difference. The plan’s legality and wisdom have been debated in editorials and blog posts, with questions ranging from the true value of the mortgages to whether the chosen homeowners deserve the help.
The New York City Council should know that the banks and institutions that hold the mortgages will not be very receptive to the concept.
In Richmond, for example, lawsuits challenging the proposal were immediate. It was also indicated that the future availability of new mortgages for buyers of homes would disappear. Richmond’s credit rating was also at risk for the City’s own financial obligations.
New York City has a population of over 8,000,000 people. According to the NYU Furman Center Report titled “State of New York City’s Housing and Neighborhoods in 2013,” there were 3,305,281 housing units with a home ownership rate of 31.7%. This means there are over one million privately owned units of housing in the City. The percentage of properties in foreclosure does not seem that great so as to require this extraordinary measure. Eminent domain has been described as an awesome power. It’s exercise should be limited. Not expanded.
It is a very controversial issue. The idea was the subject of a discussion by a panel of eminent domain experts at the annual ALI-CLE Eminent Domain and Land Valuation Litigation Seminar held in Miami Beach, Florida on January 24, 2013.* Robert Thomas, author of Inverse Condemnation, an indispensable blog, wrote in a paper on the subject:
I turn now to the recent proposal that seems to be gaining the most traction in California, for municipal governments to use eminent domain to seize underwater-but-performing mortgages, the topic of our discussion. Proponents of the scheme argue it will fix the burst bubble and right the housing market, all at little to no cost to the public. Call me a skeptic, bu this plan sounds like those from my home jurisdiction that went all farporschket. But I won’t go into the wisdom of the plan as that is beyond my meager powers as a lawyer; let’s just say I was officially agnostic until I heard the CEO of Mortgage Resolution Partners– the outfit that is spearheading the proposal– remark at a recent conference on the topic that eminent domain will have no cost. Call me a skeptic, but any time someone suggests a plan, whether or not it involves leveraging the power of eminent domain, I become highly skeptical. Eminent domain will have “no cost”? For a plan that, I think, has not fully thought out whether it will pass muster under even the low Berman-Midkoff-Kelo bar or the particulars of California’s law of necessity. And the proponents’ belief that they have correctly calculated just compensation for the underwater-but-performing mortgages appears overly simplistic and too optimistic to me. If that situation ever develops into litigation, it will be the “one-percenters,” not our homeless friends on Skid Row, who will be asserting and defending property rights.
Another panelist, Charles S. Webb, III, a prominent New York condemnation lawyer, addressed the key issue in any condemnation. He wrote:
The real problem in the plan to condemn mortgages is how do you arrive at just compensation as mandated by the Federal and State Constitutions. Assuming that the condemnation of mortgages satisfies a proper public purpose, there are a multitude of issues created by the condemnation of mortgages.
In any acquisition order, the condemnor must demonstrate it has the funding to satisfy just compensation.
In this case the performing underwater mortgage is taken in eminent domain and thus, the mortgagee must be paid the fair market value of its interest.
The mortgages at issue are performing, underwater mortgagees, which means they contemplated a higher rate of return than the current value of the property would justify.
While it is clear that performing underwater mortgages are worth more than $0 and no more than the present value of the agreed to future mortgage payments, it is not clear precisely where along that continuum the value of such mortgage would fall.
The City Council should bear in mind that New York City was unable to foreclose tax liens in the City. It dropped the procedure of taking properties with unpaid real estate taxes in rem and instead now sells the tax liens to syndicates of investors. It is these tax trusts that now enforce the procedure. So, the idea that the City should condemn “underwater” mortgages is a bad idea all around.
* This year’s ALI-CLE Eminent Domain and Land Valuation Litigation program will be held on February 5-7, 2015 at the Hotel Nikko in San Francisco.