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Posted by on Jun 24, 2012 in Bailout, Mortgage News, Principal Reductions | 14 comments | Print Print

Shiller’s Eminent Domain

Excerpted from Robert Shiller’s editorial in the

Traditionally, we think of eminent domain law as applying to land and buildings. For example, a government can use eminent domain to seize real estate along a proposed new highway route so the highway can be built in a nice straight line. It would be absurd to expect the government to bargain with each property owner to buy a strip of land along the proposed highway route and to have to redirect the highway around a farm whose owner refused to sell. That is common sense.

But eminent domain law needn’t be restricted to real estate.

It could be applied to mortgages as well. Governments could seize underwater mortgages, paying investors fair market value for them. This is common sense too. The true fair market value for these mortgages is arguably far below their face value, given the likelihood of default, with its attendant costs.

Professor Hockett argues that a government, whether federal, state or local, can start doing just this right now, using large databases of information about mortgage pools and homeowner credit scores. After a market analysis, it seizes the mortgages. Then it can pay them off at fair value, or a little over that, with money from new investors, issuing new mortgages with smaller balances to the homeowners. Taxpayers are not involved, and no government deficit is incurred. Since homeowners are no longer underwater and have good credit, they are unlikely to default, so the new investors can expect to be repaid.

The original mortgage holders, the investors in the new mortgages, the homeowners and the nation as a whole will generally be better off. There will surely be some who may not agree, like the holdout farmer opposing the highway, but eminent domain ought to be able to push ahead anyway.

San Bernardino County in California is working with a private company, Mortgage Resolution Partners, on the possibility of putting such a plan into action. We must hope this effort succeeds. If it works, it can be replicated all over the country.

But first we have to realize that much of our economic suffering takes the form of a collective action problem. We have to stop the wishful thinking that the problem will solve itself through a spontaneous rally in home prices. We need to summon our resources to exercise the authority that allows collective action.

Professor Koniak says the solution to this problem has been so slow in coming for a simple reason: “It’s the will that’s lacking! The will!”


  1. The Fifth Amendment of the United States Constitution and Article I, Section 19 of the California Constitution allow private property to be taken by eminent domain only for a “public use.”

    Traditional examples of “public uses” for which the government might exercise its power of eminent domain include such things as schools, roads, libraries, police stations, fire stations and similar public uses.

    It should be noted, however, that the term “public use” has been interpreted very broadly by the Courts. The project need not be actually open to the public to constitute a public use. Instead, generally only a public benefit is required. Elimination of blight through redevelopment projects, for example, has been held by the Courts to constitute a public benefit which satisfies the “public use” requirement of the Federal and State Constitutions. Recent cases have even allowed the use of eminent domain for the sole purpose of increasing tax revenues. This is true even though the property might be transferred to a private developer and may never be open to the general public.
    Where is the public use here?

  2. Public use?

    This will be just another money grab for insiders fighting for the vig.

  3. So lets just throw a little bit more of the Constitution away? Man we are on a slippery slope.

  4. Never happen, the corruption/theft would be horrendous. Then again, when the entitled elect themselves, the party can get heinous.

  5. Shiller’s a smart guy, but he’s an academic. I’s doubtful that he has a real appreciation for what Jim is talking about in #2.

    Still, if it were possible to get the market and the economy around it “unstuck” by forcing the write-downs of all the underwater, delinquent mortgages, it would be a good thing. The traditional way through foreclosure hasn’t been happening at a fast enough rate; the banking regulators haven’t forced the note holders to act. Some action is required, maybe the threat of losing control and money through eminent domain would push the banks & bond holders to find their own way.

  6. Or make them mark to market?

  7. Or just liberally allow lien stripping in BK court for underwater residential real estate the same as lien stripping is allowed with non residential real estate assets.

  8. The biggest king hell work out in world history.

  9. “Hi, we’re from the government and we’re here to steal, err I mean… help you”.

  10. This is scary sh*t when Gov starts using it’s power to force principle reductions. I respect Shiller for a lot of his stuff, but he lost some of my respect here. WTF private lender is ever going to want to f-ing lend in this state again if #1 they can’t foreclose b/c of all the cockamamie BS the CA democratic legislature is cooking up and #2 now they want to allow the Government to come in with eminent domain and force lenders to write down their notes. It’s time to get scared! The unintended consequences of this are going to be way higher rates, higher fees and bigger down payments IF the private lenders ever get back into lending (right now about 98% of loans are Gov back fannie, freddie, fha or VA). Isn’t this the kind of sh*t they did in Cuba in 1959? In Russia under Stalin? In China under Mao???

  11. Sounds like theft to me.

    Only an academic would propose such a ridiculous thing.

  12. Academics are always searching for a free lunch. Engineers try to come up with the perpetual motion machines, while economists search for a way so the balance sheet has winners but no losers. They run their thought experiment and think they finally have a solution to the free lunch but they always overlook some external factor. Engineers tend to forget about the energy from the sun, economists forget about the party somewhere down the line that loses.

    This solution ignores the pension fund holding the current bonds that’s actually taking the loss.

  13. I’m going to force eminent domain on Ferraris. The market value is 25K, so that’s what I’m going to pay you and forcibly detach you from your property.

    Government would spend more on lawyer’s fees than on property.

    Also, I think I just heard the pitter patter of lawyer’s hearts (could be true… if they had them)

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