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

摘要

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. In this paper, we review the legal basis and economic impact of such government-forced loan restructuring. We develop a model of negative equity mortgage default both with and without government takings to determine if using 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 increased financing costs. The weighting of this trade-off is impacted by the determination of just compensation.