How current events impact business & real estate

Wednesday, August 22, 2012

Politics - Eminent Domain to address Foreclosures

First, San Bernardino County, California, sought to seize upside-down mortgages and restructure them with more favorable terms to borrowers utilizing the government's compulsory sale powers by way of Eminent Domain.

Next, the idea was floated in Chicago.

Now, there is talk about its utilization in New York.

But, what are all of these politicians actually talking about?

As the advocates would put it, private investors will provide a municipality with the requisite funds to seize the underwater properties at market value, discounted from the loan amount as the properties are upside-down, and than purchase the restructured loans back from the government. Yet, there are many secondary effects as the introduction of this new approach to mortgage modifications adjusts the risks inherent in making loans and will likely change future loan terms for all.

Traditionally, Eminent Domain is utilized by municipalities for roads, schools and to facilitate up-zoning efforts in redeveloping districts. The concept being floated is to utilize Eminent Domain instead to force mortgagees to sell their notes and mortgages to the government for less than what is owed and to allow the government to flip the loan, at market value for the real estate, not based upon the agreed upon terms between mortgagor / mortgagee, to a new investor who will provide better terms to the borrower/mortgagor.

Can this be done in New York?

Looking at the applicable New York Statute, which is the Eminent Domain Procedure Law, Section 103 defines Real Property as follows: includes all land and improvements, lands under water, waterfront property, the water of any lake, pond or stream, all easements and hereditaments, corporeal or incorporeal, and every estate, interest and right, legal or equitable, in lands or water, and right, interest, privilege, easement and franchise relating to the same, including terms for years and liens by way of mortgage or otherwise.

As can be seen, a lien / mortgage is included. So, technically it appears on first glance that this is possible.

If it is, how much must the government pay for these underwater loans?
According to In re Public Park in City of New York, the Appellate Division held that the amount should be determined as follows:
If the portion of the land taken which is subject to the ... mortgage has a value in excess of the amount of the mortgage, then his interest is measured by the face of his mortgage and interest. If the value of the land is less than the face of the mortgage, then his interest is the value of the land, less, of course, a proper apportionment of taxes and assessments.

So there you have it, its the value of the land (at the time of the Eminent Domain) minus taxes and assessments.

Yet, interestingly, the statutory purpose for Eminent Domain in New York contains a wrinkle, which states, in pertinent part, as follows: to give due regard to the need to acquire property for public use as well as the legitimate interests of private property owners, local communities and the quality of the environment, and to that end to promote and facilitate recognition and careful consideration of those interests; 

So the question becomes, is this proposed utilization of Eminent Domain a "public use" at all or is it instead, a public purpose, which is not written as the statutory purpose for Eminent Domain?
You see the public isn't using the land at all. Instead, the public is trying to fulfill the purpose of helping homeowners in distress. Therefore, the utilization of Eminent Domain to rescue underwater homeowners in New York state appears questionable at best.

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