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Hi, I’m Eminent Domain, and I’m Here to Help?

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Twenty four years ago, President Ronald Reagan, said that the 10 most terrifying  words in the English language are: “Hi, I’m from the government and I’m here to  help.”

Speaking to a group called the Future Farmers of America, Reagan went on to say:  “…We need to look to a future where there’s less, not more, government in our  daily lives. It’s that philosophy that brought us the prosperity and growth  that we see today.”

Unfortunately, government bureaucrats in California don’t see it that way.

Three California municipalities — San Bernardino County, and two cities, Ontario  and  Fontana — have joined forces to “fix” the foreclosure problem by using eminent domain laws to seize underwater mortgages, not properties,  and then allow venture capitalists to buy and refinance the upside down mortgages. The plan’s author — a private San Francisco company called Mortgage  Resolution Partners — say borrowers would end up with less debt and the  government and its financial backers would make a profit. Supporters claim all of this will be done without the taxpayers spending a dime.

But critics of the plan say bond investors will lose billions, and they have threatened  lawsuits if the seizure plan is implemented, claiming that the contemplated use of eminent domain raises serious legal and constitutional issues. Opponents say $7 billion in mortgage-backed securities are at risk, according to a Fitch Ratings report.

The big losers here are the investors who bought mortgage-backed securities on Wall Street and are collecting monthly payments from the underwater borrowers.

Clearly, governments have used eminent domain in the past to seize property in the name of the “public good,” but eminent domain is a drastic step that, when expanded to include not only property but the mortgages too, is a broad stretch of government power. What’s next if we allow government to expunge mortgage contracts? Can government seize my 401k  in the name of the public good? Are my retirement funds safe from government overreaching? Where do we draw the line?

Reagan was right when he said we need less government, not more.

Does reducing the risk of foreclosures justify seizing loans? Is it fair to use eminent domain to generate profits for one group of private investors (and local governments) at the apparent expense of another group of investors and underwater borrowers facing foreclosure?

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