Jones Day-
This Commentary discusses a proposal, referred to below as “the property seizure program,” whereby state and local governments would use their eminent domain power to “condemn” underwater mortgages—that is, mortgages under which the outstanding amount of the debt exceeds the market value of the underlying real property. The property seizure program appears to have generated some momentum over the last few months, collecting the endorsement of both legal scholars and politicians.[1] The L.A. Times recently reported that the Board of Supervisors of San Bernardino County unanimously approved a program to use eminent domain to seize mortgages and restructure them for underwater homeowners stuck in their properties.[2]
Under the property seizure program, private investors would supply state and local governments with capital to provide compensation, at current market value, to banks, lenders, securitization trusts, and other holders of mortgages. Once the mortgages have been condemned, the governments would transfer mortgage rights to the private investors on the condition that they restructure the mortgages to account for the current market value of the underlying real property. The private investors could then retain and service the resulting new mortgages, or sell the new mortgages, presumably at a profit, to another investor.