“With more than 11 million homes still “underwater,” the mortgage debt overhang caused by the housing bubble remains an impediment to economic growth and a burden on communities across the country. One possible solution to this problem is for state and municipal governments to use their eminent domain authority to purchase and restructure underwater mortgages. This novel solution is proposed in a new report from the Federal Reserve Bank of New York. Many analysts agree that principal reductions are the best way to assist underwater homeowners—those who owe more on their mortgages than their houses are worth. Such write-downs can be difficult to achieve, however, when the underlying mortgages are securitized and held by private-label securitization trusts. Specifically, such loans are subject to pooling and servicing agreements that require collective action by a large majority of security holders before a loan can be modified. As a result, carrying out write-downs is challenging and sometimes impossible. In Paying Paul and Robbing No One: An Eminent Domain Solution for Underwater Mortgage Debt, author Robert Hockett argues that one possible way to sidestep this problem is by having governments buy and restructure underwater mortgages. By utilizing their eminent domain authority, state and municipal governments could bypass the coordination problems posed by the pooling and servicing agreements. They could then reduce the principal on underwater loans, lowering the amount owed by borrowers and thereby reducing the risk of default. The report includes details about the mechanics of such a program, including suggestions on how to finance the purchases and a discussion of the legal basis for invoking the eminent domain power. The author also addresses how to handle potential challenges, such as the existence of a second lien. “
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