Cities in California Consider Using Eminent Domain To Seize Mortgages

screen shot 2012 07 05 at 11 17 42 am Cities in California Consider Using Eminent Domain To Seize Mortgages

The government wants in. (BasicGov, flickr)

California has been the ‘cool kid’ of states, reinstating hippie-esque garb for daily wear and passing laws that appeal to a weed-loving population.

Now, the several cities in the state are toying with a novel—and highly debated—idea that would utilize its eminent domain power to restructure mortgages, without actually seizing the homes, The Wall Street Journal reports.

It’s a plan with obvious appeal for California’s many struggling homeowners, but as cool kids and trendy new ideas are sometimes wont to do, it’s ticking off a certain portion of the Cali population—the investors who own the loans.

Officials in San Bernardino County cities Ontario and Fontana, citing blighted neighborhoods and communities, propose using the state’s eminent domain power—most commonly used to seize land from homeowners and re-allot it for public use—to acquire underwater mortgages (loans that exceed current property value) and decrease the loan principle to match the current property value. They would then resell the reduced mortgages to new investors.

The idea is to keep people in their homes at a time when foreclosures are rampant. The officials want to help borrowers who owe more than their homes are currently worth.

Those in favor of the untraditional use of eminent domain say that it will help reduce the debt that’s restraining economic growth, while also helping to ward off foreclosures that chip away at the tax base. But loan owners are less than thrilled about the intrusion into their profiteering ways.

“I don’t see how you could find it anything other than appalling,” Scott Simon, a managing director at Pacific Investment Management Co., or Pimco, a unit of Allianz SE, told The Journal.

And the plan, though it sounds almost revolutionary, would not be as far-ranging in scope as it might appear. Homeowners would need to current on their payments to qualify for the program, and it would only focus on mortgage-backed securities that aren’t federally guaranteed, which accounts for only  10 percent of outstanding U.S. mortgages. Cause, perhaps, for some future Occupy protests?

Opposition or no, supporters of the plan have vowed to move forward, generating outrage and we’d expect, a number of lawsuits.

sgrothjan@observer.com