Eminent Domain Uniting Cities and Homeowners to Combat Foreclosure?

Eminent domain, or the legal process by which a government entity takes private property for public use and compensates the landowner for the taking, has historically pitted the government against homeowners and forced reluctant owners to sell property. In particular, the Supreme Court's landmark decision in Kelo v. City of New London that affirmed the city's power to take non-distressed properties by eminent domain and transfer the land to private developers for the purpose of increasing municipal revenues was seen as a blow to small property owners facing government will. 545 U.S. 469 (2005). However, amidst an achingly slow recovery from the housing crash, the city of Richmond, Calif. is working with struggling homeowners to use eminent domain to prevent further foreclosures.

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As Shaila Dewan recently reported in the Times, more than half of the mortgaged properties in Richmond are underwater and the majority of the city's homeowners are in default or at risk of default. In response to this crisis, the city sent letters to the owners and servicers of more than 600 at-risk loans- most of which are bundled into securitized trusts- offering to buy the loans for what the city considers to be fair market value. The city would then allow the homeowner to refinance at the reduced amount of the fair market value the city paid plus a small difference that would be split among the city and investors and would pay for closing costs. At the refinanced rate, most underwater homeowners would go from being hundreds of thousands of dollars in debt to having overnight equity. In the likely event that the servicers and trustees who hold the risky loans for investors refuse the city's offers to purchase, Richmond is prepared to invoke eminent domain to condemn the properties, force the sale, and provide fair market value compensation to the investors.

Richmond's very public willingness to invoke eminent domain has resulted in pushback from mortgage bankers and real estate industry lobbyists, with mass mailing and media campaigns attempting to decry the city's plan as "impermissible" and "unconstitutional" in violation of the Fifth and/or Fourteenth Amendments. The city responds that the Court's previous decisions allowing the exercise of eminent domain on non-blighted properties provided that the government is taking the land for the public good and is justly compensating the landowner (just compensation is usually determined to be fair market value). See Kelo, 545 U.S. 469 (2005); Berman v Parker, 348 U.S. 26 (1954) (ruling in part that non-blighted properties could be razed and the land transferred to developers if part of a large project involving the clearing of blighted buildings in same parcel). The City of Richmond argues that protection of residents from predatory loans, helping homeowners avoid debt and default, and staving off foreclosures in a community whose municipal revenues have already been slammed by the housing spiral qualifies as "protecting the public good" and a number of other municipalities around the country are taking notice. Later this month, cities and towns in New Jersey, Nevada, Washington, and other parts of California will consider eminent domain proposals and a steady number of housing advocates and non-profits are gearing up for courtroom battles with the banks and investors. As the latest chapter of the housing recovery unfolds in the communities hit hardest by foreclosure and the recession, the long-evolving power of eminent domain is also poised to enter a new chapter in which governments and homeowners are joined
together instead of their common positions as adversaries.