The Return of Eminent Domain

by Jeremy Loudenback

In the heady months after the U.S. economy collapsed thanks to a mortgage industry run amok, municipalities found themselves dealing with the noxious fallout: a slew of foreclosures and related problems. In the aftermath, many local leaders invoked eminent domain as a powerful and swift strategy to stem the tide of foreclosures that have hollowed out communities, leading to a smaller tax base and increased crime and neglect. While the idea gained some traction after the housing market reached its nadir under the weight of toxic mortgages, many cities have since weathered the stream of foreclosures and pursued less strident strategies, such loan modifications.

Now, the city of Richmond, CA, is reviving the debate on eminent domain. A working class city of 100,000 in the Bay Area, Richmond Mayor Gayle McLaughlin has moved forward with eminent domain plans despite warnings from the mortgage industry and real-estate interests that the maneuver may not even be legal. The city was hard hit by the recession and the resulting wave of foreclosures, but efforts to assist beleaguered homeowners have had scant success.

Richmond held sessions where homeowners could meet with bank representatives and legal aid groups, but too often, the mayor says, the efforts came to naught. Last summer, underwater homeowners owed, on average, 45 percent more than the value of their homes, according to the city manager.

McLaughlin’s plan centers on purchasing mortgages for houses considered significantly underwater as opposed to the houses themselves under a proposal engineered by a private investment group, Mortgage Resolution Partners (MRP). Using an idea first suggested by Cornell law professor Robert Hockett, the city would seize outsized mortgages, and MRP would essentially reduce the amount to a sum closer to the value of the property and refinance the loan, while also collecting a profit. The scheme has ignited a debate on the limits of eminent domain and its use a policy tool—the legal power has only rarely been used to seize intangible assets. Some commentators have criticized the tactic as a cynical attack on the financial-services industry that will result in generous mortgage terms for a private company, but for communities feeling left behind amid economic recovery efforts, the option offers a viable way to help homeowners still seeking relief from upside-down mortgages, according to Steven Gluckstern, chairman of Mortgage Resolution Partners.

“The problem is the problem’s not going away,” Gluckstern said. “If it’s not going away, you’re confronted with the issue of what you can do to help local citizens.”

With resentment of Wall Street and the housing industry still running high in communities beset by foreclosures, Richmond’s efforts at helping embattled homeowners have elicited wary interest from cities with similar woes. Irvington, N.J., El Monte, CA, Newark, N.J., and several others are considering eminent domain mortgage seizures and watching the progress in Richmond, though the threat of legal action from the Federal Housing Finance Agency and other real-estate interests have slowed talk of implementation. After failing to acquire a fifth vote in a council vote that would have enabled the city to use eminent domain on its own, Richmond is now seeking to partner with other communities in a joint powers authority. The city now sees its best hope to use eminent domain seizures through an broader initiative process that would include other partners or a network of cities in California or nationally. For now, most cities will wait, and watch.

Though no municipality has invoked eminent domain in this context, the continuing efforts of Richmond and other cities to explore the option are a sure sign that the troubles caused by foreclosure are still an ongoing problem for many communities,. Whether the courts decide that eminent domain is a robust way to address the issue remains to be seen.