Eminent domain is the legal procedure by which a government seizes ownership of land and compensates the owner as best they can. Usually, eminent domain is only exercised for the construction of highways, utilities, or public works. The city of Richmond, CA, however is using eminent domain to seize houses with troubled mortgages.
According to CNN Money, using a private investment firm, the government will “offer” to purchase mortgages of financially troubled homeowners at a reasonable price. This is a Potemkin offer, however, because if the homeowner refuses, the government will seize their mortgage after August 14. The city government argues it is doing this out of concern for the public interest.
The initial idea was proposed not by local government but by a local investing firm, Mortgage Resolution Partners, which offered to find the money to buy the mortgages. The private company provides the money and the legwork, while the government provides the legal monopoly on deadly force. In return, the company gets a 10% kickback when the loans are refinanced.
Temporary fixes notwithstanding, many investors would rather have foreclosure over forfeiture. Many stand to lose financially. The normal lending we are only now beginning to glimpse from gun-shy banks may scare and they may lessen their loans to homebuyers.
“There will be longer-term harm as lenders are likely to pull out of those markets and mortgage financing costs across the board are likely to rise," says Jaret Seiberg, a banking analyst at Guggenheim Partners. “We want the city to purchase the loans at fair market value so we can manage our lives more effectively and economically."
Sources: CNN Money