Here’s a novel idea to fight the foreclosure threat: Allowing cities and towns to use their eminent-domain powers to take over underwater homes and then effectively reissue mortgages for lower amounts, reflecting the true and lower value of homes.
One of the main problems facing the housing industry is that a lot homes are now underwater, or valued less than the original mortgages taken out on them, and yet those individual mortgages are stuck in huge securities packages that makes them hard to get at. It’s almost impossible to individually modify these loans.
But if a government could take over a specific property, and its mortgage, via eminent domain, and then find new investors to issue a more favorable mortgage to people, then, voila! End of problem. Or so the theory goes.
One problem: Do you really want the government using such powers? It would be a very unorthodox use of eminent-domain powers. What’s to stop local municipalities from using that same power for other home-ownership programs? The possibilities of mischief and favoritism seem almost endless.
Still, it’s a fascinating, if somewhat discomforting, idea.
An update: Scott notes that there’s still a huge gap between what sellers and buyers think is the true value of a home.