At least 15 communities are considering using eminent domain to rescue homeowners with underwater mortgages.
It’s proving to be a controversial idea, and one that these communities may have reached for in desperation. All 15 suffer from high unemployment, stagnant incomes, high poverty, high shares of cost-burdened homeowners, and high vacancy rates. Seizing private loans, they argue, may be the only way to save their communities and prevent potentially irreversible neighborhood damage.
How the plan works
As of the second quarter of 2013, 23.8 percent of all U.S. homeowners with a mortgage owed more than their homes were worth. More than 57 percent of these homeowners were underwater by 20 percent or more, and roughly one in seven owed more than twice what their home was worth. Many of these underwater homeowners are concentrated in communities with significant social and economic problems.
The plan to use eminent domain to save these homeowners would work something like this: first, a city would make purchase offers on underwater loans, which would allow the city to reset the loans to reflect fair market value and resell them to homeowners at the adjusted price (e.g., if a homeowner owes $300,000 on a home that’s worth $200,000, the city would purchase and resell the loan to the homeowner for, say, $195,000, which is closer to the home’s current value). If mortgage holders refuse to part with their loans, then the city would forcibly seize the loans through eminent domain, on the principle that the seizure serves a public purpose by stemming foreclosures and preventing associated neighborhood blight.
San Bernardino County, California, was one of the first communities to consider using eminent domain to seize underwater loans; and since 2012, approximately 15 communities have expressed interest in the plan. These communities had contacted potential partners to pursue the eminent domain plan, had discussed the plan at city council meetings, or had otherwise expressed interest in using eminent domain in this way. Richmond, California, is on its way to becoming the first city in the nation to execute this plan, while the city council in Pomona, California, is currently weighing whether to adopt it.
Communities considering eminent domain share traits of high unemployment and poverty
Considering that most of the nation appears to be entering a housing recovery period, given rising prices, we wanted to know what these 15 communities have in common. As it turns out, a lot.
Using American Community Survey data from 2007–2011, we found that all 15 communities suffer from problems with poverty, unemployment, and low housing prices. Except for Suffolk County, all the municipalities have unemployment rates exceeding the national average and reaching into the mid-teens, ranging from 10.4 percent in North Las Vegas to 17.4 percent (double the national rate) in Wayne County, Michigan.
In six municipalities, more than a fifth of all residents live below the poverty level; in Newark, it’s more than a quarter of all residents.
We compared the change in median household income between the 2007–11 American Community Survey and the 2000 Census, adjusting the income data from 2000 for inflation using the Bureau of Labor Statistics’ Inflation Calculator. When adjusted for inflation, median income decreased in nearly all communities examined. This follows the national trend, since U.S. median real income fell by 4 percent between 2000 and 2011. In Wayne County, real incomes dropped by 39 percent, and in Suffolk County, New York, they dropped by 21 percent.
We tracked the changes in residential housing prices from peak to trough, trough to recovery, and peak to recovery. We used generally accepted time periods for the peak (2006) and trough (2011–12), and used the latest data (2013) for the recovery. We looked at all the cities that have considered the eminent domain plan and compared the changes in housing price indices (HPI) against the counties and states in which they reside. The data indicate that none of the municipalities have recovered as well as the nation overall. Based on housing price recovery from peak to recovery, none of the cities are improving as well their home states, and nearly all lag behind their counties.
All of which is to say that the cities and counties that have considered eminent domain are, in essence, pockets of distress left behind as the tide of the recession gradually pulls back.