Many home owners have been affected by the recent housing market crash. Many people have lost their homes to foreclosure, while others ended up owning a home that is worth much less than it did when they bought it. Having to pay back a mortgage loan for a home that is worth much less than it did before the crisis will make most home owners want to get rid of it. Unfortunately, selling your home for less than you owe, means that you will have to pay back the difference to your lender.
Abandoning your home if your mortgage is underwater is a solution, but you will have to live with the consequences of foreclosure (Read: The Foreclosure Process). Having your credit ruined and not being able to take out a new loan for several years is not an option for most people. Because many home owners are underwater on their mortgage and facing foreclosure, many municipalities have started looking for solutions to avoid having to deal with whole neighborhoods of deserted homes. One of the ways in which counties and cities are trying to help home owners who own more than their homes are worth is eminent domain. Click here to read more.
What is Eminent Domain?
The power of eminent domain allows the government and its agencies to take private property and use it in a way that benefits the public. For example, the government can use a seized property for a school, a park, a new road and more. The owner of the property that is seized by the government under eminent domain is entitled to compensation, which is usually the fair market value of the property.
The government agency that is interested in your property hires an appraiser who will inspect and appraise the property, after which the organization makes you an offer. The offer will generally be low, but there is some room for negotiations. After the negotiations, if you are not satisfied with the offer, the organization will schedule a public hearing in which it will have to prove why your property is needed for public use. After the public hearing, the government agency will submit a complaint against you in court, which you can challenge, but it will be most likely overruled. Your attorney will have to obtain appraisal reports from other appraisers in order to determine the property’s fair market value.
Eminent domain can also be used to help home owner whose mortgages are underwater. Some analysts say that underwater mortgages slow down the economy, so using eminent domain will help the economy and allow people to stay in their homes. Others say that using eminent domain to save underwater mortgages will hurt the economy because lenders will react to this by increasing interest rates. Click here to learn more about the restrictions.
Reasons Why Using Eminent Domain Won’t Save Underwater Mortgages
Using eminent domain to save underwater mortgages was attempted in a few Californian cities back in 2012. The plan was abandoned because it didn’t receive the public support that was expected, and was strongly opposed by mortgage regulators Freddie Mac and Fannie Mae. While the plan to use eminent domain to come to the rescue of those with underwater mortgages sounds fairly good in theory, it has plenty of disadvantages. Here are the reasons why your underwater mortgage won’t be saved by eminent domain.
- The eminent domain process is very complicated. Many home owners won’t agree to this method because they probably won’t receive as much money as their home is worth at current market prices. Each home is different, has unique features, so designing a simple plan will be very difficult and will become bureaucratic.
- Eminent domain can be abused. Most people don’t support this plan because it can easily be abused, so some home owners may receive more than they deserve for their properties, or less. Also, home appraisals rely on the appraiser’s judgment, so there is a chance that mistakes will be made, and many properties will be appraised incorrectly.
- Lenders and mortgage regulators oppose this solution. Fannie Mae and Freddie Mac, who guarantee 90 percent of all mortgages issued in the United States, do not agree with using eminent domain to save underwater mortgages, so they are threatening with limiting business activities in cities that use this solution.
- The government will be put in an awkward position. Because mortgages are contracts between lenders and borrowers, a government intervention will not be well received by most lenders. The government usually refrains from interfering with private contracts.
Saving underwater mortgages by using eminent domain may seem like a good idea, but there are serious repercussions to following this plan, and most cities will most likely try other methods of helping those with underwater mortgages (Read: How These Alternatives Can Help You Avoid Foreclosure). Eminent domain has its uses, but using it to save underwater mortgages will only cause controversy and put the government in a bad light.