going above and beyond
- Feb 19, 2001
Can your city seize your mortgage?
3 California governments aim to invoke eminent domain to fight blight — and help restructure borrowers' underwater mortgages.
A handful of local officials in California who say the housing bust is a public blight on their cities may invoke their eminent-domain powers to restructure mortgages as a way to help some borrowers who owe more than their home is worth. (Bing: What is eminent domain?)
Investors holding the mortgages predict the move will backfire by driving up borrowing costs and further depressing property values.
"I don't see how you could find it anything other than appalling," said Scott Simon, a managing director at Pacific Investment Management Co., a unit of Allianz SE.
How it works
Eminent domain allows a government to use force to acquire property that is reused in a way that is considered good for the public — new housing, roads, shopping centers and the like. Property owners are entitled to compensation, which a court usually determines.
Instead of tearing down property, California's San Bernardino County and two of its largest cities, Ontario and Fontana, want to put eminent domain to an unorthodox use to keep people in their homes.
The municipalities, about 45 minutes east of Los Angeles, would acquire underwater mortgages from investors and cut the loan principal to match the current property value. Then they would resell the reduced mortgages to new investors.