University of Arizona economist Price Fishback, who has been on this blog before, is one of the leading scholars of the economics of the New Deal. He has a great new set of insights to share on the U.S. mortgage mess. He's also the co-author of the forthcoming book Well Worth Saving: How the New Deal Safeguarded Home Ownership, with Jonathan Rose and Kenneth Snowden.
The Folly of Eminent Domain Takings of Failing Mortgage Loans
By Price Fishback
Several cities around the country are considering using eminent domain to take control of troubled mortgages in their cities. An Associated Press example of how the proposal will work calls for the city to use eminent domain to force the lender to accept $150,000 for a $300,000 mortgage on a home that has a current market value of $200,000. The city would then refinance the loan while cutting the principal owed by the borrower to $190,000.
Eminent domain requires a public purpose for the taking of an asset. The public purpose claimed here is that property values and property tax revenues can be boosted by preventing a mass of foreclosure sales. Real estate studies do show that increasing numbers of foreclosure sales are associated with lower housing values in nearby neighborhoods. However, the spillover benefits of preventing foreclosures, tend to be focused on houses in nearby neighborhoods.