Is Eminent Domain the Answer to Foreclosure Crisis?

Officials in San Bernardino, California are considering a proposal that would allow the government to leverage its eminent domain rights to relieve the foreclosure crisis.

The plan would entail applying eminent domain law to buy the mortgages for homes that are underwater. After that, the county government would reduce the mortgage to the current value of the property, and then it would resell the mortgages to a private investment firm, Mortgage Resolution Partners, which would lower the monthly payments.

The hope would be that the homeowner could stay in the property, reassume the maintenance and restore neighborhoods currently blighted by foreclosure.

Mortgage Resolution Partners would receive a fee for each “refinance” it provides.

But not everyone is on board with the plan.

The Securities Industry and Financial Markets Association (SIFMA) released a legal memo drafted by O’Melveny & Myers LLP partners Walter Dellinger, Jonathan Hacker, and Matthew Close that addresses what they say are a number of legal and constitutional problems.

As currently conceived, the MRP proposal suffers from multiple apparent legal and procedural defects, including defects arising under the U.S. Constitution and the California Constitution and under the laws of California and San Bernardino County governing the exercise of eminent domain authority, wrote Walter Dellinger of O’Melveny & Myers. In light of these defects, we believe the MRP proposal is unlikely to survive a judicial challenge.

Among the issues with the proposal identified by O’Melveny & Myers are potential violations of the “taking” provisions under the federal and state Constitutions; a violation of the provisions concerning contracts, interstate commerce, as well as the “common powers” provision of the county’s charter.

They fear that the legal structure of the MRP proposal would expose the participating municipalities and taxpayers to potentially enormous liability to existing note holders if courts recognize ” as they likely will ” the correct market value of performing loans.

“Mr. Dellinger’s analysis confirms our belief that there is a strong basis on which to challenge the legality of using eminent domain in the mortgage context, said SIFMA President and CEO Tim Ryan.

Earlier this year, San Bernardino County created a Joint Exercise Powers Authority in agreement with the cities of Fontana and Ontario to devise a Homeownership Protection Plan. The proposal by MRP — a private company — to use eminent domain is one idea being considered under that framework.

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