Professor Proposes Eminent Domain for Underwater Mortgages

Sep 10, 2013

A Cornell University law professor recommends that Seattle consider using its power of eminent domain to stem the foreclosure crisis. But that idea is controversial, and a California city that said it planned to try using eminent domain for that purpose is now being challenged in court. 

Cornell’s Robert Hockett was hired by Seattle to study the extent of the foreclosure problem here and make recommendations.

Hockett says the crisis hit Seattle later than much of the country, but now the city has a higher percentage of homeowners who are underwater than the U.S. as a whole. That means they owe more than their homes are worth, and Hockett says they’re more likely to fall into foreclosure.

To stop that from happening, Hockett says the city needs to find ways to bring the value of the loans down so that they equal what the homes are worth.

Unusual Approach

Hockett is advocating something unusual—that cities like Seattle use the power of eminent domain to take over underwater mortgages and make them affordable so the homeowners can stay put. Hockett concedes that use of eminent domain may surprise people.

"It’s very tempting, if you’re not an expert on this, to think, `Oh, eminent domain, that’s about taking land, isn’t it?'" Hockett said. "But in fact, it’s not. It’s about taking property, and as many forms of property as there are is as many forms of property as are subject to the eminent domain authority, and that includes intangibles such as mortgage loans."

He says eminent domain hasn’t been used before for mortgages, but he thinks it’s a viable option under the law.

Richmond Lawsuit

A test case is taking place about 800 miles to the south.

The San Francisco Bay Area city of Richmond said it planned to use eminent domain to buy underwater mortgages and reduce the value as a way to keep struggling homeowners in their homes. But that drew a lawsuit from government-sponsored mortgage giants Fannie Mae and Freddie Mac and big investment groups.

But Hockett says other cities are considering the idea, including Newark, New Jersey. 

A Seattle City Council committee will hold a hearing on Hockett's findings and recommendations Wednesday afternoon. 

(Update 9/13/13: A judge declined to grant an injunction blocking the city of Richmond's eminent domain plan, saying the city wasn't far enough along in the process for the court to get involved.)