Upcoming Classes

Search CFLA's Article Archive:

Seizing Underwater Mortgages: Unconstitutional and Dangerous

americanbanker.comJuly 11, 2012

By Brian J. Murray

Certain mortgage investors have recently proposed that state and local governments use their power of eminent domain to "condemn" underwater mortgages—that is, mortgages where the outstanding amount of the debt exceeds the market value of the property. The idea appears to have generated some momentum over the last few months, collecting the endorsement of both legal scholars and politicians. The Los Angeles Times recently reported that the Board of Supervisors of San Bernardino County unanimously approved a program to use eminent domain to seize mortgages and restructure them for underwater homeowners stuck in their properties.

Under the mortgage seizure program, private investors would supply local governments with capital to provide compensation, at "market value," to banks and other holders of mortgages. The governments would then transfer mortgage rights to the private investors on the condition that they restructure the mortgages to account for the current market value of the underlying real property. The private investors could then sell the new mortgages, at a profit, to another investor.

The mortgage seizure program creates serious concerns for holders of mortgage-backed securities, which are typically issued through securitization trusts to which those mortgages were transferred. If underwater mortgages were condemned at a steep discount to their face value, the holders of mortgage-backed securities issued by such trusts could face significant losses. In addition, uncertainty regarding further governmental action relating to mortgages could result in decreased demand for mortgage-backed securities at a time when investor confidence is only just starting to recover.

Potential unintended consequences aside, the mortgage seizure program may not even be constitutional.

The Taking Is Not for "Public Use." Under the Fifth Amendment's Takings Clause, a taking is permissible only if it is for a "public use," meaning that it is motivated by a "public purpose." In Kelo v. New London, the Supreme Court held that the Takings Clause allowed the government to seize a private home and transfer it to private developers. But the Court emphasized that the "public use" requirement places real limits on the government's Takings Clause authority.

Kelo explained, for example, that a taking is not for "public use" when it is "for the purpose of conferring a private benefit on a particular private party." The mortgage seizure program, however, can function only if private investors are able to extract value from the mortgages in excess of the compensation provided. Thus, the program's primary motivation is arguably to enrich private investors, such that any public benefits are incidental.

Further, Kelo reserved the issue of whether a taking is for "public use" when it is an isolated transfer "executed outside the confines of an integrated development plan." The mortgage seizure program may fall within that reservation because it will likely involve many distinct determinations regarding dispersed properties. This piecemeal approach may render the program "prone to abuse," justifying a relatively high level of judicial scrutiny.

The Program Impairs Contracts. The U.S. Constitution's Contract Clause forbids state and local governments from impairing contracts, including between private parties. The mortgage seizure may violate the Clause because it would entirely eliminate the contract rights originally held by mortgage-owning entities. Furthermore, the program would radically transform, if not eliminate, the returns on mortgage-backed securities whose terms are predicated on the current face value of existing mortgages.

The government might draw on the famous Depression-era decision in Home Building and Association v. Blaisdell to argue that courts should defer to legislative assessments in this area, at least when the government's own contracts are not at issue. Unlike the law in Blaisdell, however, the mortgage seizure program entirely eliminates all contract rights, is permanent as opposed to merely temporary, and does not operate by way of a generally applicable prospective state regulation on business operations.

If the government can eliminate mortgage contract rights, then it would be hard to imagine what contracts could not be set aside in the name of market efficiency.

The mortgage seizure program poses significant constitutional questions. It arguably violates the Takings Clause because it was designed by third-party investors for the express purpose of creating profits for those investors. And the program arguably violates the Contract Clause because it entirely eliminates mortgage-based contract rights, including in connection with mortgage-backed securities.

Brian J. Murray is a partner in the issues and appeals practice at Jones Day in Chicago.

Back to July 2012 Archive

CFLA was founded by the Nation's Leading Foreclosure Defense Attorneys back in 2007 to serve the Foreclosure Defense Industry and fight pervasive Bank Fraud. Since opening our virtual doors, CFLA has rapidly expanded to become the premier online legal destination for small businesses and consumers. But as the company continues to grow, we're careful to hold true to our original vision. For us, putting the law within reach of millions of people is more than just a novel idea—it's the founding principle, just ask Andrew P. Lehman, J.D.. With convenient locations in Houston and Los Angeles, you can contact Our National Account Specialist and General Manager / Member Damion W. Emholtz at 888-758-2352 for a free Mortgage Fraud Analysis or to obtain samples of work product, including cutting edge Bloomberg Securitization Audits, Litigation Support, Quiet Title Packages, and for more information about our Nationally Accredited and U.S. Department of Education Approved "Mortgage Securitization Analyst Training Certification" Classes (3 days) 24 hours for approved CLE & MCLE Credit (Now Available Online).

SEE BELOW- http://www.certifiedforensicloanauditors.com

Call us toll free at 888-758-2352

Bookmark and Share
Facebook Like us on Facebook
Twitter Follow us on Twitter
YouTube View our YouTube Videos
LinkedIn Connect to us on Linkedin
BBB Logo


Contact us or view our Sample Documents & Audits by completing the form below.

International Bloomberg Securitization Audits


DVD Sets Only $99


FREE Mortgage Fraud Analysis


Order Cutting-Edge Services Now


Affiliate Services


CFLA Sponsored Attorney Links


Take-Home Education Package