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Eminent domain, wrongly redefined

August 9, 2012

I was in San Bernardino County, California not too long ago, and I know well — from first-hand observation and from friends’ and colleagues’ first-hand reports — that the downturn in the economy there has been difficult. This, in turn, is compelling the local government to introduce a unique solution compared to other locales, the invocation of eminent domain. But, newly defined. The plan would allow the county to seize the mortgage of an underwater homeowner, paying the lender “fair market value” and offering the homeowner a new mortgage at the current value and interest rate, through an affiliate lender.

Eminent domain is supposed to be used for putting in a highway, building a bridge, benefiting everyone by promoting growth and driving jobs. In San Bernardino, they’re hoping that if they can just reset values, people will start paying taxes again and generate the revenue they need to pay civil servants. You don’t want to live where there is limited police, garbage collectors or firemen, trust me.

Except that’s the worst-case scenario. People aren’t high-tailing it out of San Bernardino. They want to stay. They hope things will improve. They’re hanging in for the long-shot. And if legislators push through this eminent domain claim, it’s going to end up in state Supreme Court, bogged down for years behind more important issues and pressing cases, and pushing us ever farther behind in the chance of recovery.

On the surface this may seem like a rational way to deal with the underwater households that plague San Bernardino County and the surrounding area. It will allow homeowners to stay in their homes because they now have a new mortgage that they are able to pay and this will generate property tax revenue for the struggling county. A win-win for both, right? 

Wrong. County officials have grossly overstepped the definition of eminent domain which could be potentially tied up in the California judicial system for years to come.

Not only is it a leap to say that seizing a homeowner’s mortgage (without their approval or request) is in the greater good of the county. It further hampers a struggling community because the cost of financing in the future will be greatly increased, if available at all. 

Lenders will want a premium placed on transactions in this area to offset the risk of having their loan seized via eminent domain. Current residents may find that it becomes difficult to refinance their current mortgage, obtain auto loans or credit cards.

Another factor to consider is the drop in appeal that the community will have for people considering relocating to the area.  San Bernardino may find that these potential new residents find housing in near-by competing communities that does not come with the burden and eventual restrictions this change would place on San Bernardino residents.

I’ve been watching this locale for a long time. At its inception and certainly at its height, San Bernardino County could’ve been the master plan for American urban development. It’s beautiful, isolated and peaceful. The idea of interconnecting a series of villages, freeing people from congestion and the rat race was brilliant. Bring the jobs to the people; keep the people at home. Build real communities, where people know their neighbors and never want to leave.

As a Detroiter, I can relate to the quandary San Bernardino faces.  There are more parallels than you would think: Massive bills to provide municipal services but no revenue. No way to balance a budget. Here, people fled the city. There, growth never materialized. The county built it and they didn’t come. We built a one-industry town and ended up with open fields in the city. Different root cause, same end-result.

In both places, housing plummeted. San Bernardino: Bought for $800,000, worth $300,000 today if you’re lucky. Detroit: Don’t get me started.

Of course, California is more over-leveraged than Detroit. It’s an insanely expensive place to live. It may be easy to give up on your house – and that’s the fear that’s driving all this eminent domain talk. Except the reality is that only a small fraction of homeowners are walking away, hands in the air, pocketbooks focused elsewhere. Most homeowners continue to pay, even as they tread water. Most still pay taxes. Most hope for a better future.

So how is swiping their mortgage and forcing them into a no-win situation in their best interests? In anyone’s best interest?

I understand the government’s fear. Doesn’t make it right, though.

Government has failed at orchestrating a housing recovery every single time it’s tried to be involved over the last five years. If government officials would just let the market work itself out, ride the wave of pain until we get through it to the other side, they’ll catch a wave back to shore. That will happen – if we let it.

Instead, this eminent domain talk is going to create other collateral damage.

Please, let’s let the system work its way through. Still, the truth remains that fewer than 8% of mortgaged households are delinquent and significantly fewer are strategically defaulting. Yes, that’s hundreds of thousands – but so many more households are not in that boat.

How much can you rationally sacrifice for the greater good?

Rodney Carey is CEO of Woodward Asset Capital, parent company of OfferSubmission and VerifiedShortSale.

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