California Towns Might Use Eminent Domain To Seize, Restructure Underwater Mortgages

In a sign of desperate times, some California city officials may be using some drastic measures to help the glut of struggling borrowers.

In California's San Bernardino County, and in the cities of Fontana and Ontario, policymakers are considering a plan to use eminent domain -- that civic power that allows a government to seize whatever property it likes -- as a way to acquire the mortgages of distressed homeowners and restructure them in a way that allows the borrowers to stay in their homes.

This plan isn't without its detractors, though. Banking and housing groups have warned that if municipal governments start going around refinancing mortgages at will, it could lead to big losses for the investors in those home loans -- which means those investors might be less likely to extend credit in those towns in the future.

But advocates of the plan say it's a way for these California towns to gain some forward momentum in moving past the housing crisis. Last month, the Yale economist Robert Shiller argued in The New York Times that the idea that "the problem will solve itself through a spontaneous rally in home prices" is simply "wishful thinking."

There's no clear precedent for using eminent domain powers this way, according to the WSJ. For city officials to consider this kind of outside-the-box approach is a sign that in California, as elsewhere, the depressed housing market remains an urgent problem.

In the Inland Empire -- the region of Southern California where the eminent domain plan is under consideration -- more than half of all borrowers owe more on their houses than the property is worth, according to a recent analysis by the real estate company Zillow.

And help from other avenues may not be forthcoming. In the $25 billion mortgage settlement reached between 49 states and five of the country's largest lenders earlier this year, California received more than $400 million to help distressed homeowners, but as is the case in many other states, governor Jerry Brown has proposed using most of that money to shore up the state budget.