A proposed plan to help underwater borrowers in California is making its way through several local markets while sparking outrage from Constitutionalists who believe lawmakers could end up violating private property rights under the guise of creating a program for upside-down borrowers.

As previously reported in HousingWire, policymakers in a few local California markets want to pass a law that would allow the government to use eminent domain to seize underwater mortgages from investors, allowing officials to gain possession of the mortgages and then restructure the loans to help borrowers.

Mortgage Resolutions Partners is shopping the plan as a cost-effective way to handle underwater mortgages, said Ed Pinto with the American Enterprise Institute. But investors are left taking the loss, prompting Pinto to say the process "is more like grand theft mortgage than a silver bullet."

The proposal raises constitutional questions — one of which is the reach of eminent domain, a legal concept that already has controversial Supreme Court precedent.

In the Supreme Court's 2005 Kelo v. City of New London case, a majority of the justices held that a city could use eminent domain to seize private property to sell for private development since the seizure can technically qualify as a "public use" due to its part in an overall economic plan for the area.

In the Kelo case, the city had already acquired neighboring properties, but nearby homeowners refused to sell. The homeowners challenged the use of eminent domain saying it violated the Fifth Amendment's takings clause when a city takes private property and sells it for private development. The Supreme Court squeezed the plan in by saying the plan was for the overall public use of the area; therefore, the takings clause argument against eminent domain was not violated, according to the majority opinion.

It's unknown if the Mortgage Resolutions Partners-supported plan will go as far as becoming law. But if it does, the Constitutional questions – especially in light of the Supreme Court's 2005 decision – will definitely stir the investor and mortgage finance communities.

kpanchuk@housingwire.com