Should Governments Use Eminent Domain to Acquire Underwater Mortgages?

by: Anthony F. Della Pelle
20 Jun 2012

In an unprecedented move, a group of venture capitalists out of San Francisco hopes to convince county and local officials in California to use the power of eminent domain to seize control of private residential mortgage-backed securities with the intent of cutting the principal balances of negative-equity borrowers.

As proposed, Mortgage Resolution Partners would work with local governments to find institutional investors willing to provide tens of billions of dollars to finance the condemnation process to avoid using taxpayer dollars to acquire millions of distressed mortgages.  The local government would take title to the loans, without taking title to the actual home, and pay the original mortgage owner the fair value with the money provided by institutional investors.  Mortgage Resolution Partners would then allegedly work to restructure the loans to reduce homeowners’ monthly mortgage payments, while selling the restructured loans to hedge funds, pension funds and other institutional investors with the proceeds paying back the outside financiers.  Additionally, Mortgage Resolution Partners would collect a fee on each restructured loan.

In New Jersey, the courts have broadly interpreted the language of the Local Redevelopment & Housing Law (LRHL) and Eminent Domain Act of 1971 that defines “property.”  Citing Harrison Redev. Agency v. DeRose, 398 N.J. Super. 361, 409-11 (App. Div. 2008)*, the New Jersey Supreme Court determined that “the language the Legislature used to define ‘real property’ and ‘property’ in the LRHL and the Eminent Domain Act cross-reference each other and require cognate interpretations.”  Town of Kearny v. Discount City of Old Bridge, Inc., 205 N.J. 386, 405 (2011).  The LRHL defines “real property” as: “all lands, including improvements and fixtures thereon, and property of any nature appurtenant thereto or used in connection therewith, and every estate, interest and right, legal or equitable, therein, including terms for years and liens by way of judgment, mortgage or otherwise, and indebtedness secured by such liens,” N.J.S.A. 40A:12A-3, while the Eminent Domain Act defines “property” as “land, or any interest in land . . . .”  N.J.S.A. 20:3-2(d).  The express mention of a mortgage, in addition to the catch-all “any interest in land” could potentially provide a government entity with support to condemn a mortgage interest.

Even if the concept of using eminent domain to “take” mortgage interests was accepted by New Jersey’s courts, there could still be an argument over the “fair market value” of the mortgage.  Fair market value in New Jersey has been determined as the price a willing and able buyer would pay to a willing seller.  The “property” owner, the holder of the mortgage, would likely argue that mortgage should be valued based on the existing obligation of the mortgagee to pay the agreed upon principal and interest.  The condemning agency would likely argue a value based on the current reduced value of the land secured by the mortgage.  In New Jersey, the question of value would be decided by a judge and jury.

This will be an interesting one to watch.

For more on this story, please see the following news articles and opinion pieces:

Investors tout ‘condemnation’ for housing fix

A solution for underwater mortgages: Eminent domain

RPTInvestors tout controversial ‘condemnation’ for housing fix

Investors With Ties To Buffett, Soros, Obama Plan Mortgage Eminent Domain Grab

Eminent domain is floated for mortgages

SAN BERNARDINO COUNTY: Controversial mortgage fix considered

County Studies Eminent Domain to Address Mortgage Crisis

*The property owners in DeRose were represented by McKirdy & Riskin’s Richard DeAngelis, Edward McKirdy and Anthony Della Pelle.