Abuse of Eminent Domain

I am always astounded by the creativity of elected officials who fail to look beyond the short-term impact of their decisions, especially when pressed by self-serving elements of our society. Recently in Arizona, Hawaii and California, there were efforts to pass state legislation to use eminent domain to take mortgages from lenders and repay them only 97 percent of the fair market value. Eminent domain is the taking of private property by a government for public use, in exchange for payment of fair market value. In this recent case, the alleged “fair market value” would likely have been so far below the real market value, that hedge fund investors were willing to finance the scheme. They were anticipating a quick and high return on their investment upon selling the mortgages, or upon foreclosing and selling the properties.

The losers, of course, would have been the legitimate original lenders, clearly the victims in this governmental mandate to twist the intent of the eminent domain process, with the result of a de facto cram down. Fortunately the state legislatures finally came to their senses and did not pass any of these bills.

However three cities in California have now banded together and are attempting to push through the same misguided process, armed with a mutually owned corporation and the hedge fund. This “solution” may relieve some borrowers in the short run, but I cannot imagine how much damage it will inflict in the long run on the mortgage markets and, therefore, on the home building industry. Why would any lender choose to make a mortgage loan, knowing that the contract could be violated by legislative fiat at any time? No one would make mortgages!

It is hard for me to believe that this abuse of eminent domain could survive any court challenge. But I have been surprised before, so this issue bears our watching. While I doubt this scenario will play out in Indiana—because we did not experience the significant price fall that afflicted Arizona, Hawaii and California—we must unite as an industry to fight this travesty. The next assault on long-held processes, like eminent domain, may have a direct effect on Indiana.

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