Unusual eminent domain plan stirs LI talk

From the juncture of public politics and private finance comes an unusual proposal that is generating buzz in both worlds.

It involves using eminent domain, local government's sometimes-controversial right to seize property for public purposes.

Proponents tout it as relief for those in debt and a potential boost for ailing local economies.

And it has drawn preliminary discussion on Long Island.

Since the national housing bubble burst several years ago, millions of homeowners found their mortgages "underwater." That is, they must make payments based on more than what is now the actual value of the houses. They spend less on other items, which slows local economies.

Now officials of San Bernardino, Calif., are considering a plan to use eminent domain to take over underwater mortgages. Under the plan, a private investor would come in and refinance the property on better terms for the homeowner.

Eminent domain, proponents say, would become a legal tool to force mortgage investors to sell those loans, at market value.

Mortgage Resolution Partners, a California firm, has been pushing the concept, offering the government the money up front to make the purchases, making money by charging a fee per transaction.

Of course, there are those who dislike this idea and skeptics who see practical problems.

Representatives of the securities industry have warned in San Bernardino that the use of eminent domain could reduce access to credit for borrowers. Another argument goes that the housing business has been recovering, that the waters are subsiding, and that loan modifications to stem defaults are common.

California Lt. Gov. Gavin Newsom has replied: "The Washington, D.C., special interest groups need to back off. We owe it to homeowners everywhere to see if the solutions being discussed in San Bernardino will work."

In Chicago, an alderman named Ed Burke held a hearing on the topic, saying that "renegotiation of underwater mortgages by the private sector has failed to keep pace" with the crisis in the city's neighborhoods. But Mayor Rahm Emanuel opposes the move, saying condemnation is not "the right instrument" for the problem.

In Suffolk, Kevin McCabe, co-founder of an advisory firm allied with Mortgage Resolution Partners, met several weeks ago with staffers for County Executive Steve Bellone to pitch the concept. Bellone spokeswoman Vanessa Baird-Streeter acknowledged that the aides when contacted "took the opportunity to hear the initiative" but said "no additional steps have been forthcoming."

The power of eminent domain has most commonly been used to acquire real estate, not mortgage holdings. In the landmark 2005 case of Kelo v. City of New London, for example, the U.S. Supreme Court ruled 5-4 to uphold the transfer of land by eminent domain from one private owner to another -- in the name of furthering economic development.

Christopher Niedt, academic director of Hofstra's National Center for Suburban Studies, stressed that the San Bernardino plan does not involve taking real property -- a "critical distinction." He noted that some have criticized the plan because it relies on a private-sector middleman, who may not purchase the mortgages of those who need assistance the most.

But Niedt said he believes that if communities and politicians are able to avoid these pitfalls, "it's an approach that has potential."