Municipal Condemnation of Mortgage Loans

By John Vlahoplus*

INTRODUCTION

Cities across California and the nation are considering using their powers of eminent domain to purchase both performing and defaulted underwater mortgage loans (those whose principal balance exceeds the value of the encumbered home). They seek to reduce principal on the loans in order to minimize defaults, short sales and foreclosures, and thereby to mitigate the broad community costs of the negative equity crisis (the "Municipal Plan"). Many cities are specifically considering purchasing loans held in private securitization trusts, which do not benefit from any federal government guarantees.

The Municipal Plan is certainly controversial, and opponents have raised constitutional challenges and criticized it as poor policy, as unlikely to achieve its stated goals, and as providing significant benefits for private parties (including private parties that fund the loan purchases or advise cities).¹ This essay considers the applicable law in the context of the principal legal challenges to the Municipal Plan.