John Vogel is an adjunct professor at Dartmouth's Tuck School of Business.
In San Bernardino County, Calif., half of the houses are "underwater," meaning the houses are worth less than the amount owed on the mortgage. Greg Devereaux, the county's chief executive officer, is considering using eminent domain to help solve this problem. As Joe Nocera wrote in his July 9, 2012, New York Times column, "When you first hear this idea, it sounds a little crazy." However, Nocera goes on to say, "the more closely you look at it, the more sense it starts to make."
The Fifth Amendment to the U.S. Constitution gives the government the right to take private property for public benefit as long as it serves a "public use" and there is "just compensation." The most common uses of eminent domain are for building or expanding roads, subways, and utilities. For example, New York City used eminent domain to secure the subsurface rights to over 1,800 properties in order to construct a tunnel for its water system.
In addition to the federal and state governments, many local authorities can take property by eminent domain. In Texas, 90 different entities have this power. In Virginia, 40 agencies can take property through eminent domain. Let me provide an example of how eminent domain might work with underwater housing: Assume that Mr. Jones owns a house that is currently worth $200,000 and has a mortgage for $300,000. The government entity could take the house through eminent domain. It is required to pay just compensation which is the value of the house or $200,000. The $200,000 payment would then flow through to the mortgage holder. The government could then sell the unencumbered house back to the homeowner for $200,000 and either provide a mortgage or have the homeowner get a traditional mortgage. Some schemes have the government entity seizing the mortgage, instead of the property, at a substantial discount, but I think that may be less beneficial, especially since so many of these properties also have second mortgages.
Should San Bernadino County or some other agency use the power of eminent domain to deal with the problem of underwater houses, I see five significant positives and five significant negatives to this concept. The key positives are:
On the other hand, eminent domain is a blunt instrument and there are at least five negatives to using it.
There are a number of policy proposals that might work better than eminent domain. For example, changing the bankruptcy laws so that mortgages are treated like other forms of debt might be simpler and fairer, and would probably produce better results. But that would require an act of Congress.
We are now four years into the housing crisis. To date, all of the programs designed to help homeowners have been "voluntary to the lender" and have failed to make much difference. As Brad Miller, a congressman from North Carolina wrote back in February 2010 in The New Republic advocating the use of eminent domain: "Every government foreclosure mitigation effort so far has depended entirely on carrots for the industry, usually designed by the industry itself. …Eminent domain will provide foreclosure mitigation efforts with a badly-needed stick."