There’s a new foreclosure remedy being explored around the country, the use of Eminent Domain to bring mortgages under the power of local government. Michael Sauvante of The National Commonwealth Group in Ohio gave a talk at a public banking conference in 2012 outlining the concept. He has some action guides on his website, Main Street Matters.
He starts with some interesting ideas about how counties can get involved in the foreclosure process to help reduce fraud and inform homeowners about their rights and protections.
The essential idea is to use the process of Eminent Domain – which allows the government to force the sale of property. We’re most familiar with it as used on Real Property – specifically Real Estate, to allow development of public infrastructure or even private infrastructure deemed in the public economic interest. There are a number of current lawsuits over the use of Eminent Domain for oil pipeline expansion in multiple states. Sauvante makes the point that Eminent Domain can be used for any kind of property, including contracts. His idea is to use the power of county government to step in and buy mortgages for current fair market value (part of the legal requirement of the exercise of Eminent Domain) and then renegotiate payment with the homeowner. Because the government will now be holding these mortgages, he pairs the idea with creating a public bank, though notes it can essentially function as a governmental department.
Newark, NJ is among the municipalities considering this idea, and David Dayen criticizes it in an article in The New Republic. Eminent Domain seems powerful because it can be used to compel people to do things they don’t want to do, like sell part of their property. However as David points out, the mortgage holders that most need help are the non-payers, and those are assets that nobody really wants because they’re not valuable. It’s a good point, and David’s one example of an organization trying to do this is a for-profit organization, so unsurprisingly they’re not having much success. Michael seems to have more of a non-profit entity in mind, one that could perhaps fundraise to withstand poor returns or losses. Further, one that defines “valuable” to be something greater than investment return; to include things like mitigated damage to the tax base and community fabric. Avoided costs makes this more compelling to a local government than to a third party investor who doesn’t face those costs.
I also wonder if Michael & David are interpreting “fair value” differently. David suggests that “fair value” would have to be based on the value of the contract which he defines as face value. Michael may be thinking that fair value would be based more on the current market value of the underlying property. That’s a very important difference for who gets to eat these losses, and David notes that mortgage holders have already started taking steps to solidify their claims, though looking at the base documents it seems to so far be saber rattling about potential future credit damage that might occur to municipalities that try this.
Richmond, California just hired the for-profit company to help them. The industry response, published in April is here and we’ll have to see what happens next!