Eminent Domain and Underwater Homes
posted by Gerard Magliocca
The recent discussion about proposals in San Bernandino and other cities to use eminent domain to, in effect, force a principal reduction in mortgages that are underwater is quite interesting. Setting aside the question of whether this is a good idea, I’m wondering if there is a valid constitutional objection here.
It seems clear that Congress could order a principal reduction in mortgages under its Commerce Clause powers. State legislatures could probably do the same, though I’d have to look at the fine print in Blaisdell to confirm that assumption. (What, at this point, does the Contracts Clause do?) I’m not an expert on takings law, but it does seem strange to say that if the state takes my house and pays me the fair market value, then gives the house to a third-party to sell back to me at a lower price, that the bank must give me, the homeowner, a mortgage for that now-cheaper house? Why is that exactly? And won’t I still take a big loss?
Now I guess the state could set “just compensation” at higher than market level (in effect, a bailout) of the homeowner that would allow the bank to recoup its principal, then put the house back on the market (at market value) with an option to the homeowner to, if he or she could get a mortgage, buy back the house. (Nobody, I guess, has standing to challenge an overly generous payout for eminent domain.) Is this what people have have in mind? If so, it seems unlikely to work. Distressed municipalities won’t have the money, and states will lack the political will to help some homeowners at the expense of others.
What I am missing here?