Local Governments Consider Creative “Rescue” of Homeowners in Foreclosure

Three local governments in California are contemplating a new plan where they would use their eminent domain powers to acquire homes that are underwater (i.e. meaning borrowers owe more than the current value of the home) and enable their owners to refinance at the lower value.  According to the legal dictionary, eminent domain is described as follows:

The power to take private property for public use by a state, municipality, or private person or corporation authorized to exercise functions of public character, following the payment of just compensation to the owner of that property.

Federal, state, and local governments may take private property through their power of eminent domain or may regulate it by exercising their Police Power. The Fifth Amendment to the U.S. Constitution requires the government to provide just compensation to the owner of the private property to be taken. A variety of property rights are subject to eminent domain, such as air, water, and land rights. The government takes private property through condemnation proceedings. Throughout these proceedings, the property owner has the right of due process.

Eminent domain is a challenging area for the courts, which have struggled with the question of whether the regulation of property, rather than its acquisition, is a taking requiring just compensation. In addition, private property owners have begun to initiate actions against the government in a kind of proceeding called inverse condemnation.”

San Bernardino County and two of its largest cities, Fontana and Ontario, have joined forces to consider this controversial plan.  San Bernardino County, which is east of Los Angeles, has suffered the highest level of unemployment and foreclosures seen in the country.  Home prices have fallen by half of their value since the peak of the housing market.  Under the plan, the three governments would use their eminent domain powers to acquire homes that are underwater from owners who have been making timely payments.  The governments would pay the owners of the mortgage fair market value of the property to release the liens.  The governments would allow the homeowner to re-purchase the property at the lowered price (effectively refinancing the property), for a flat fee of $4,500.

There are lots of legal hurdles to this plan as well as opposition from taxpayers, bankers and other constituents.  Eminent domain is supposed to be used for public benefit.  Does this plan fall under the definition of public benefit?  Only time will tell if this plan will work or even be attempted.  However, this is one creative approach to tackling the foreclosure issue.

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