A crazy idea refuses to die: A recently-published report by the Federal Reserve of New York renews the debate over a plan proposed by San Francisco-based Mortgage Resolution Partners (“MRP”) to seize underwater mortgages through an unconventional use of a municipality’s eminent domain power. At least four California cities have tentatively agreed to the MRP plan, including Richmond, San Joaquin, La Puente and Orange Cove. Each of these cities suffered significantly from the collapse of their local real estate markets, but some commentators cite falling delinquency figures to say that the moment has passed for the MRP plan. These cities are not entirely alone. Our readers will recall that several California municipalities (and a number of cities elsewhere, including Chicago) briefly considered MRP’s highly unusual plan to use eminent domain to purchase mortgages. Of course, eminent domain is more commonly (and logically) associated with governmental seizure of land in connection with public works projects. The power is used generally to serve the public good by paying the private party just compensation for the taking. 

One of the largest California communities to consider the measure is San Bernardino County, an “Inland Empire” community in the forefront of communities seriously debating MRP’s plan to use eminent domain to seize troubled mortgages for a discount off the face value, then restructuring the loans based on the present value of the homes. After months of spurring national debate on the legality and risks of the proposal, the county’s Joint Powers Authority unanimously voted down the proposal on January 24, 2013, due to a lack of public support. While there are other cities that expressed interest in the MRP proposal, none have actually implemented the plan. The closest to implementation is El Monte, California, one of the first to sign an agreement with MRP. According to acting city manager Jesus Gomez, the city is still months away from beginning mortgage purchases.

There are some signs that the debate is moving from the municipal to the federal level. MRP and national mortgage industry groups are putting pressure on the White House and the Department of Housing and Urban Development to issue decisions regarding the use of eminent domain to seize mortgages. It is not clear that the renewed debate will result in federal direction on the issue. To date, the Obama administration has avoided public comment on the idea, which some administration officials have referred to as a local issue.