In an Oct. 1 op-ed article, David Reiss writes that it is eminently reasonable for government to use the “ancient prerogative” of eminent domain to take so-called underwater mortgages from lending institutions and strike new, more favorable deals with borrowers.
The principal amount of such a mortgage, he explains, would be brought “in line with a mortgage that would be appropriate for the fair-market value of the home.”
We will leave aside obvious concerns relating to the moral hazard that such a program would engender. (If I know government will bail me out, why not overextend myself on my next home purchase, too? And why stop at houses? I have my eye on a nifty red Maserati. If I can only get the dealer to take back paper, maybe government can rewrite my deal to one that’s more appropriate to the fair-market value of my now used and steeply depreciated ride.)
The main problem with Reiss’ logic is that the plan he endorses is neither as clearly constitutional as he assumes nor workable.
Let’s start with constitutional. He relies on the bland assertion that the “public purpose” (actually public use) requirement of the U.S. Constitution (and that of most of the states) can be satisfied because the scheme he favors entails payment of “just compensation.”
Payment of just compensation is a necessary condition of the exercise of eminent domain power, but does not by itself satisfy the Constitution’s requirements.
Private property may only be taken for a public use, even if compensation is paid. What is the public use that supports the Reiss plan? Surely not the entirely speculative suggestion that his plan has “implications for halting blight, keeping property tax rolls healthy and maintaining vibrant communities.” See, for example, Gallenthin Realty Development, Inc., v. Paulsboro, 191 N.J. 344 (2007), which requires a showing of actual blight that exposes neighboring properties or communities to its expanding deleterious influences.
The professor’s conflation of the just compensation and public-use requirements of the Constitution may account for his citation of Louisville Stock Land Bank v. Radford, 295 U.S. 555 (1935). While the U.S. Supreme Court invalidated the legislation at issue in that case on the ground that it failed to provide compensation, the court did not reach the second issue — whether the taking was for a public use.
The only authority he cites for the notion that the constitutional mandate is so expansive that it countenances “taking land from one private party and giving it to another” is Kelo v. City of New London, 545 U.S. 469 (2005), one of the most reviled U.S. Supreme Court decisions in decades. Not only was Kelo the subject of a torrent of law journal articles and editorials denouncing it, but 44 states passed legislation specifically protecting their citizens from having their property taken to be conveyed to other private parties. Kelo affirms that the states may limit government’s power of eminent domain. In any event, it is more likely that a majority of the Supreme Court would seize on the opportunity to limit, distinguish or overrule Kelo, rather than to follow it.
As for its workability, neither Reiss nor any other proponent of the plan has explained how a homeowner will be substantially helped if he is relieved of the burden of his mortgage, but is still liable on the underlying debt. Or does the plan envision taking the debt instrument as well?
If that is the case, how do you measure the worth of that obligation? Is the debt of borrower Smith worth more than that of borrower Jones because Smith has a better job, better credit or more “skin in the game”? Moreover, Reiss simply assumes that the value of a mortgage will be reduced by the fall in value of the house. But if the mortgage is performing, its value will be the potential income stream capitalized at an appropriate rate, one that may well be substantially lower than the nominal mortgage rate (because of lower current interest rates) — and the mortgage may therefore be worth more, not less, than its face value. (This is the same principle that explains why bonds increase in value when interest rates go down.)
Finally, Reiss totally understates the uncertainty and consequent chaos that his plan would introduce into the home-finance industry. We got into this mess in large part because government first pursued a policy that favored home ownership, even when the future homeowners had dubious credit and uncertain prospects for actually being able to afford their purchases, and then the government chose to spend billions to bail out the lenders. The way out of the mess is not to repeat the process by embarking on a constitutionally questionable and practically unworkable project. •