Can Eminent Domain Help Underwater Homeowners?

By / 7.17.2012

Several California counties are considering a controversial proposal to use their eminent domain powers to offer relief to underwater homeowners. The plan is quietly being shopped to counties hit hardest by the housing crisis, and it seems local politicians are listening.“We have a very large problem that’s causing severe economic problems and part of our exploring ways to deal with it is hearing from people like those representatives of the securities industry,” said San Bernardino County Chief Executive Officer Greg Devereaux.

This has provoked a sharp reaction from Wall Street banks. In a letter to San Bernardino Supervisors, a coalition of securities investors said “Such an action would likely significantly reduce access to credit for mortgage borrowers in the San Bernardino area and other areas that undertake similar actions.”

It’s hard not to sympathize with the the Riverside-San Bernardino-Ontario metro area, where half the mortgages are underwater and the unemployment rate for May was 11.8%. And some progressives may find it hard to be sensitive to the plight of the Wall Street banks that hold most of the underwater mortgages in San Bernardino.

But the basic policy question here is whether the proposed cure would be worse than the disease. Using government’s eminent domain powers to force investors to eat the losses on underwater mortgages is a very drastic remedy to the problem of negative equity. While it could ease the burden on some homeowners, it could also drive private investment out of California housing markets. This would only prolong the housing slump and deepen the state’s economic malaise.

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