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Area considers eminent domain to fix mortgage problem

The idea hasn't caught on in Philadelphia yet, but officials in one county in a western state think they have a solution for the country's continuing mortgage problems: a form of eminent domain.

Municipalities typically invoke eminent domain to acquire property to build projects. But in this case, officials want to use eminent domain to take the mortgages of homeowners who have a mortgage larger than their homes are worth.

Private investors would buy out the mortgages at what is deemed fair market value, then sign the homeowners to new mortgages that reflect the lower value of the houses. Homeowners would stay in their houses and have more affordable mortgage payments.

A major lobbying group for banks, however, opposes the proposal, citing the Constitution. Another real estate expert said the market is already starting to correct itself, and enacting such a plan would encourage homeowners to stop making their payments, hoping to qualify for the reduced mortgage.

There is the question, too, of what would be considered fair market value. It probably would be a wholesale price at least 20 percent below an expected sales price. And, one opponent said, that would lead to the big players grabbing up all the mortgages for homes that otherwise could have gone into foreclosure.

That, he said, would drive first-time buyers who could possibly now afford a home out of the market. Same for small investors who might want to start building a real estate portfolio by starting with foreclosures or short sales.

No one knows how this plan will shake out, but officials are listening. Ultimately, this eminent domain tactic might prove right for this county, which has been hard hit by the recession and foreclosures. Other areas might not want to rush in to alter the course of the residential real estate market through eminent domain.

Source: Bloomberg, "Eminent Domain Is Bad Ploy for Underwater Mortgages," Steven Greenhut, June 28, 2012

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