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Using Eminent Domain to Write-Down Mortgages: An Economic Analysis

Thomas Miceli and Katherine A. Pancak
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Katherine A. Pancak: University of Connecticut

No 2013-05, Working papers from University of Connecticut, Department of Economics

Abstract: A handful of economically distressed cities and counties are considering using their power of eminent domain to write down the principal of underwater mortgage loans. Analogous to the condemnation of tangible real estate for public use, the city would “take” intangible mortgage loans from the lenders or investors holding the loans. According to the proposed idea, the underwater mortgage loans would be acquired for less than their stated face value, and then written down, refinanced, and sold to investors. This article reviews the legal basis and economic impact of such government forced write-down and refinancing. We develop a model of negative equity mortgage default both with and without government takings, to determine if the use of eminent domain is socially desirable from a policy perspective. We find a trade-off between the immediate benefits of avoiding current mortgage defaults and longer term costs of increased interest rates. The weighting of this trade-off is impacted by the determination of just compensation.

Keywords: Default; eminent domain; mortgages (search for similar items in EconPapers)
JEL-codes: K11 R31 R38 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2013-03
New Economics Papers: this item is included in nep-law and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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