California Municipalities May Seize Private Property To Redo Mortgages

Several cities in California are reportedly seeking to utilize their eminent domain power to renegotiate mortgages. The plan is to seize private homes about to enter foreclosure from banks, pay the banks “just compensation” – which may or may not be the full amount of the loan – unilaterally downgrade the principal loan amount on behalf of the resident, and then resell the mortgages to other lenders.

So, to take an example, assume there is a homeowner in Ontario, California who bought a house for $300,000 that is now worth $150,000. The municipality would seize the property, pay the banks something for it, unilaterally decide that the mortgage is now $150,000, and resell it to a bank. Taxpayers would foot the difference.

How is this transfer of property from one private party to another possible? It’s legal under Kelo v. New London (2005), which stated that government can seize property via eminent domain and hand it over to a third party private party, so long as the government can show that it will gain tax revenue – to prove “public use,” the government must only show a rational purpose.

This proposal follows hot on the heels of a California state law that will stop banks from engaging in robo-signing, which allows banks to foreclose quickly and efficiently, and “dual tracking,” which allows banks to attempt to renegotiate mortgages while at the same time considering preliminary foreclosure steps. That bill is designed to prevent foreclosures from taking place – or at least, it’s designed to dramatically slow the process.

This is a disaster in the making for the California economy. Nobody knows where the California real estate bottom is; the state of California and its municipalities keep preventing the market from hitting the bottom. Sales are therefore slower than they otherwise be; bad borrowers remain in homes, and good buyers are prevented from buying by artificially inflated prices. No wonder the economy of California remains stagnant.


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