Monday, December 30, 2013

Your Government vs. Your Bank: Estate Planning & Eminent Domain

Estate Planning

You’d think that banks might be happy for a solution to the mortgage crises. Especially in areas of the country where a majority of homes are underwater, mortgages are delinquent, and homeowners are abandoning their homes in droves. But one recent proposal to help with the problem has big banks up in arms. The solution involves the government obtaining underwater mortgages under its power of eminent domain.

A company called Mortgage Resolution Partners (MRP) developed this proposal, and is working to get county and city governments on board. The idea is that if banks fail to sell the loans to the government when offered fair market value, the government can force the sale under its power of eminent domain. Once the government owns the mortgages, MRP refinances the smaller (fair market value) loans, resulting in much more affordable payments for the homeowners.

The solution works because in the areas hardest hit by the burst of the real estate bubble, today’s fair market value is well under the amount financed (thus the rash of “underwater” mortgages). For example, a home in Richmond California that was worth $300,000 when financed might only be worth $200,000 today. In this case, a homeowner’s payments on the refinanced loan would decrease from $800 per month, to a much more realistic $300 per month. (Mother Jones Sept 10, 2013).

If the proposal is implemented, ideally the homeowners’ get to stay in their homes, the county solves the economic problems that result when fleeing owners leave neighborhoods full of empty homes, and MRP makes a few bucks in the process (keep that in mind during your estate planning meetings).

Why the Big Banks Are Balking

So, what’s the problem with the proposal? In short, the displeasure of the nation’s four biggest banks– Bank of America, JPMorgan Chase, Citigroup and Wells Fargo. Under the eminent domain scenario, the big banks must realize the losses suffered when the real estate bubble burst. Currently, due to accounting practices which allow loss deferment, many banks have delayed recognizing these losses. On paper, it’s as though the losses have not occurred. Upon the forced sale of the loans at actual fair market value, however, the banks will be forced to actually report their losses and leave this comfy fantasy world. (

To avoid this, the big banks have done their best to put up roadblocks to dissuade governments from commencing the eminent domain solution. They have threatened legal challenges and injunctions against any government that proceeds with eminent domain. So far, governments have been slow to get on board with the eminent domain solution in the face of all this big bank saber rattling. However, legal scholars agree that the arguments the banks are putting foth against eminent domain likely won’t hold water.

Requirements for Eminent Domain Action

People typically think of eminent domain as a method for the government to obtain land (for example to purchase homes in the way of a planned super highway route). However, eminent domain is not limited to real property. Governments have also successfully used eminent domain to obtain intangible property (such as trade secrets). So long as fair market value is paid, there is no legal prohibition against a government using eminent domain to obtain mortgages.

The law of eminent domain basically requires the government to meet two main criteria: it must pay fair market value for any property obtained, and it must be acting in the public good. To determine the fair market value of a mortgage, the government need only look at comparable foreclosure or current market sales. As far as showing a public purpose, fixing the foreclosure crises in order to keep homeowners in their homes and keep hard-hit areas’ economies rolling should surely suffice.

Will Eminent Domain Work? Wait and See…

So far, one brave city, Richmond, California has started procedures that could result in eminent domain purchases of mortgages. Depending on the success in Richmond, other cities or counties might soon follow suit. No doubt threats and legal challenges from the banks will be unavoidable and cause delays in any solution. Can government win in this battle against the big banks? We can only wait and see.


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