Underwater and Drowning? Some Facts about Mortgages that Could Be Targeted by Eminent Domain

by Sabrina I. Pacifici on February 13, 2013

Andreas Fuster, Caitlin Gorback, and Paul Willen, Federal Reserve, New York: “Since the onset of the subprime crisis, many places across the United States have been affected by high levels of negative equity (meaning that borrowers owe more on their mortgages than their homes are worth), an associated flood of foreclosures, and loss of local wealth. In mid-2012, a community advisory firm, Mortgage Resolution Partners (MRP) approached the government of San Bernardino County, California (a region with particularly high levels of negative equity) and pitched the idea of using eminent domain to seize privately securitized mortgage loans in order to restructure or refinance them. The MRP proposal was largely based on a plan by Cornell University law professor Robert Hockett. In late January, this controversial plan was abandoned by San Bernardino County, yet it remains under consideration in other counties. While a lot of the debate surrounding the plan has centered on value judgments and legal issues, in this post we look at available data in order to get an idea of the landscape of loans that could have been affected by such a program in San Bernardino County. There are a few key takeaways from our analysis. First, the share of privately securitized mortgages that are still active five years after the beginning of the subprime crisis is relatively small. Second, while a vast majority of these loans in San Bernardino County is severely underwater, the required payment (at least on the first lien) has decreased significantly for many of them. And though these loans continue to enter serious delinquency at relatively elevated rates, things look much better than they did three to four years ago, in part because house prices have increased quite rapidly over the past year. When evaluating the costs and benefits of policy options such as the use of eminent domain, these facts should be kept in mind.”

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