Eminent domain: The government's latest weapon against underwater mortgages

There is little doubt that underwater mortgages – those that are worth less than the current value of the home they are attached to – are a serious problem in the United States. A massive amount of negative equity prevents millions of Americans from developing economically, whether that involves opening a business, buying a new home or even paying off a simple credit card bill. These stoppages in economic progress threaten to blunt the ongoing recovery, but recent developments suggest that the fight against underwater mortgages has entered a new – and potentially dangerous – phase.

According to a recent white paper from the Reserve Bank of New York, the Federal Reserve System's branch in the Big Apple, local and state governments may want to consider utilizing eminent domain to tackle this problem. Eminent domain has a complex history in the U.S., fraught with legal and moral quandaries that have prevented the practice from being widely used. Simply put, eminent domain allows a government entity to appropriate private property – in this case, a mortgage – ostensibly in the public interest.

The concept involves a municipality or related organization essentially confiscating a piece of property and, following the action, writing down the value of the mortgage. The author of the white paper, Robert Hockett, also suggested that underwater borrowers could be extended a line of credit to their local government, thereby keeping the existing mortgage at least somewhat active.

This idea has been explored previously with little success, as the concept's legality is questionable in some constituencies and, as a result, could put financial institutions – especially regional banks that do not have the kind of support enjoyed by mega banks – at risk of their own problems.

Ultimately, independently minded investors should look to developments like this as signs that serious economic reform may take years to accomplish. In the mean time, pursuing alternative avenues of income like cash flow real estate might be a wise option. To learn more, download our Free Game Plan report today.