Eminent domain is a powerful, constitutionally legal tool that allows local and state governments to essentially seize private property for an overriding public benefit, such as clearing away a whole neighborhood of houses to construct a freeway.
The main reason San Bernardino County is considering using eminent domain to relieve certain qualified homeowners of their troubled mortgages is to jump start the Inland Empire’s housing construction industry. Regional economist John Husing says the construction of new homes in the Inland Empire has practically ground to a halt, in part because so many existing homes are being forced into the housing market by foreclosures and short sales.
“We have the highest unemployment rate in the United States for an area of a million or more people in San Bernardino and Riverside counties. We’re not going to get out of that until we put residential construction back to work,.”
So to try to curtail foreclosures, San Bernardino County is looking into using eminent domain to take underwater mortgages away from the mortgage lenders. The county would compensate the lenders at what’s called fair value, but it would be less than what was owed on the original mortgage. No taxpayer money would be used; the county would compensate the mortgage lenders with funds provided by a group of private investment partners the county has assembled.
Then, the county would offer the homeowner a new mortgage that might be for a little more than what the county paid for it, but lower than what the homeowner was paying on. Presumably then, just about everybody wins: the county and its investment partners make a little money, and homeowner has new lower mortgage with a lower interest rate. However, there would be losers, namely, the original lenders the county seized the mortgages from. That’s a problem for Paul Herrera, the Government Affairs Director for the Inland Valleys Association Of Realtors.
Herrera thinks the whole scheme improperly allows the government to pick winners and losers in what’s supposed to be a free market:
“this is a broad expansion of government power in property rights, saying that they can now decide who’s property rights matter and who’s don’t.”
Furthermore, Herrera says , just the prospect of the county seizing mortgages through eminent domain could scare banks and other mortgage lenders away from providing mortgages on that new housing construction that the county so desperately wants:
“You know, there are less interventionist and less precedent-setting ways of addressing this problem than to make the largest expansion of eminent domain and create the largest public taking north of Venezuela.”
Herrera says up to now, San Bernardino County’s discussions about the program have been behind closed doors, and he says that at least now he’s happy the story is out for public debate.