The City of Chicago will hold a hearing over using eminent domain to seize underwater mortgages.
The idea first came under consideration in San Bernardino County, Calif. Venture capital firm Mortgage Resolution Partners is pitching the idea to several cities across the country. Using investor dollars, local governments would seize performing mortgages in negative equity, reduce the principal for the borrower and refinance it into a government-backed loan.
Chicago Alderman Edward Burke, chairman of the city finance committee, scheduled the hearing this week. According to a city council document, Burke sees a chance the idea could clear legal hurdles.
"Legal experts have opined that government entities may use eminent domain to acquire mortgages so long as certain legal standards are met," according to the document.
More than 44% of the homes in surrounding Cook County back are worth less than the mortgage. According to the city, local homeowners lost more than $37 billion in equity since the housing market crashed.
The San Bernardino proposal would affect less than 1.5% of private-label security loans in the area as the mortgages are bought out of pools. Investors are concerned, the idea would spread, with some arguing that the iniative may acutally do more harm than good.
Mortgage bonds backed by jumbo loans – those presumed to be targeted by the program – could see losses rise more than 30% than already expected should a national eminent domain program be implemented, according to a recent report from Moody's Investors Services.
On the other side of the idea, however, private investors looking into joining MRP expect returns as high as 30%, according to a recent article in The Wall Street Journal.
Isaac Boltansky, a policy analyst for Compass Point research, said it's unlikely the eminent domain program will be scalable, but other areas will consider it.
"In the coming weeks and months we expect more municipalities to announce their intent to explore the use of eminent domain to seize underwater mortgages," Boltansky said.
Burke invited city's chief financial officer, the commissioner of the housing department and local representatives of the mortgage industry to the hearing.