Using eminent domain to refinance underwater mortgages: A welfare analysis

Thomas J. Miceli, Katherine Pancak and Kathleen Segerson ()

International Review of Law and Economics, 2017, vol. 51, issue C, 12-22

Abstract: This paper evaluates the welfare consequences of the proposed use of eminent domain to forcibly refinance “underwater” mortgages (mortgages for which the remaining loan balance exceeds the value of the house). Our results show that, in the absence of transaction costs, the policy unambiguously increases welfare, regardless of the amount of compensation paid to lenders. However, when takings generate transaction costs, we show that in a competitive mortgage market where borrowers fully finance the needed compensation through lump sum taxes, welfare is decreasing in transaction costs, but more generous compensation for lenders may either increase or decrease social welfare.

Keywords: Eminent domain; Just compensation; Mortgage foreclosure (search for similar items in EconPapers)
JEL-codes: G21 K11 K35 (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:eee:irlaec:v:51:y:2017:i:c:p:12-22

DOI: 10.1016/j.irle.2017.05.001

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