Another city hard hit by the housing crisis has proposed exercising its power of eminent domain on behalf of its underwater homeowners.  The City Council of Brockton, Massachusetts voted this week to commission a study into the feasibility of such a move, joining several municipalities in California and the City of Chicago which have already taken a look at such an undertaking.

Brockton, an old industrial city located south of Boston, has seen the median price of its housing drop from $260,000 to around $120,000 since the first quarter of 2007 and home sales during the same period drop by about a third.  The proposed plan is designed to stabilize the housing market, curtail blight, and return homeowners to a positive equity situation.  If adopted, the City would use eminent domain to take foreclosed properties (REO) from lenders and sell them to city residents and non-profit organizations.  Under the plan the City could also seize underwater mortgages from the investors who hold them, restructuring them to reflect the value of the underlying collateral then reselling them to other investors at that new value.  

In the middle of this plan is a new firm established for the sole purpose of facilitating the mortgage purchases.  Mortgage Resolution Partners was founded last summer by Phil Angelides, formerly the chairman of the Financial Crisis Inquiry Commission which investigated and issued a lengthy report on the causes of the U.S. housing market collapse and a former California state treasurer.  According to Reuters, Angelides is seeking financial backers for his company, telling potential investors his plans to buy mortgages at a deep discount could generate a 20 percent annual return. 

Reuters offered this quote from a letter the company sent to prospective investors.  "We just might do a good thing for America, and along the way get a great return on investment.  If our hopes do not pan out, the amount wagered should be a deductible loss."

When the plan first emerged in San Bernardino County California it got a lot of push back.  Objections have increased over time.  Almost immediately twenty trade organizations led by SIFMA the lobbing group representing the securities industry protested the proposals and made it clear they would litigate any eminent domain action.  Representative John Campbell (R-CA) introduced a bill titled The Defending American Taxpayers from Abusive Government Takings Act which would prohibit the four major government sponsored mortgage providers from buying loans in any community and the Federal Housing Finance Agency (FHFA) as conservator for GSEs also joined in and conducted a period of public comment on the subject.   All of these opponents argue that the idea of using eminent domain, especially to seize loans, would constitute an unconstitutional seizure and an unwarranted abridgement of investors' property rights and that lenders would effectively boycott any community that adopted such a plan.