The Elegant Eminent Domain Solution to Negative Equity and Foreclosures

The following is an excerpt from the My Take column that appeared in the January 2013 issue of the Foreclosure News Report.

Economists and government officials alike agree that principal should be reduced when it reaches insurmountable levels.

Robert C. Hockett of Cornell Law School wrote the following in his paper titled “Paying Paul and Robbing No One: An Eminent Domain Solution for Underwater Mortgage Debt That Can Benefit Literally Everyone.”

“It is now widely appreciated that principal write-downs will have to be done on a broad swath of underwater mortgage loans. Debt loss must be formally recognized in a manner commensurate with fair-value-accounted equity loss. For write-downs are better than defaults, which plague underwater mortgages at ominously high rates — rates we’ll soon see in more numbers.

Indeed for much underwater mortgage debt, principal write-downs actually maximize value. We find evidence for this in the rates at which portfolio mortgage loan holders, as distinguished crucially from securitization trusts, write down debt.”

Principal reduction is the way to save local communities. It benefits the entire community by preventing defaults and foreclosures, thereby stabilizing neighborhoods and protecting essential public services.

However, PLS loans are uniquely structured, making standard methods of principal reduction, including refinance and modification extremely difficult if not impossible. Securitization agreements and tax laws prohibit the sale of toxic PLS mortgages except when the mortgages are condemned.

Graham Williams is CEO of San Francisco, Calif.-based Mortgage Resolution Partners, a community advisory firm working to stabilize local housing markets and economies by keeping as many homeowners with underwater mortgages in their homes as possible. Previously he was senior vice president and director of residential lending at Bank of America and Sr. Vice President of Risk Management at GE Capital.

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