The crackpot scheme being considered by some municipalities to seize residential mortgages through the power of eminent domain in order to write down principal balances to current depressed market values, then sell the written down mortgages to investors, thereby using governmental power to punish existing mortgage loan investors but make a favored new class of investors (and the investment bankers who originated this scheme) rich, has generated plenty of push-back, including, as we recently noted, threatened legislation at the national level. An additional roadblock was recently discussed by Dana Berliner, one of the attorneys on the losing side of the US Supreme Court's 2005 Kelo decision, in which, as Berliner observes, "the Court ruled that the mere possibility of 'economic development,' i.e. increased jobs and tax dollars, in a city justified taking private homes and transferring them to a private developer." That opened the floodgates for schemes such as the seizure of mortgages scheme. However, the SCOTUS left the door open for the states to prohibit this practice.
Although it denied federal constitutional protection for individual’s rights, the Court took care to note that if states wanted to provide more protection to property owners, they could do so.
The states took the Court up on this suggestion. Forty-four changed their laws in response to the decision, and all 44 made it more difficult to condemn property for the benefit of other private parties.
Fortunately, the post-Kelo changes in state constitutions and state statutes will prohibit such shenanigans. Cities claim that the benefit of these condemnations will be that they will make the cities economically better off and make the housing markets there stronger. But when states prohibited condemnations for economic development in the wake of Kelo, they prohibited the use of eminent domain based on the vague and frequently inaccurate guesses of municipal officials about what might generally make their city better off economically. California prohibits eminent domain for economic development (and did even before Kelo).
After also explaining the inconvenient truth that seven years after the Kelo decision, nothing has been built on the property seized from homeowners by the city of New London, Connecticut, Berliner finishes with a flourish.
Finally, this proposal mainly takes property from banks, pension funds, and impersonal investors, tempting us to ignore the danger it represents. Such apathy is short-sighted. The legal principles involved are the same as if the city tried to take property from private individuals. When state and local governments began justifying the taking of property for “economic development” in the 1950s, it started by condemning shopping malls from big corporate owners; it ended by condemning tens of thousands of individual homes and businesses, including the little pink house at the center of the Kelo v. City of New London decision. The proposed use of eminent domain for mortgages violates state statutes and state constitutions. If it can happen to mortgage investors, it can happen to you.
As we've claimed previously, Judge Gideon Tucker's oft-quoted (and Mark Twain-appropriated) maxim continues to ring true: "No Man’s life, liberty or property is safe while the legislature is in session." That applies to legislatures at the national, state, and, now, local levels.