As an update to an earlier post that is continued below, there are more minds examining eminent domain and our real estate collective action problem.  It has been shown that when the value of a home falls below the value of the mortgage debt — when it is underwater — a person is much more likely to default on the mortgage.  A Cornell University law professor, Robert Hockett, completed an outline for the use of eminent domain by municipalities in resolving the mortgage debt impasse.  Professor Hockett argues that a government can seize certain, chosen mortgages, pay them off at fair value, or a little over that, with money from new investors, issuing new mortgages with smaller balances to the homeowners. Taxpayers are not involved, and no government deficit is incurred. Since homeowners are no longer underwater and have good credit, they are unlikely to default, so the new investors can expect to be repaid.  Now that we are over four years into this housing crisis, it might be time for us to stop the wishful thinking that the problem will solve itself through a spontaneous rally in home prices.

Original post on March 23, 2012:

Lauren Willis explains how eminent domain can be the tool used to launch us out of this housing crisis.  I understand that one perspective is that irresponsible homeowners are getting what they deserve with a foreclosure.  We are four years into this collapse already though.  The irresponsible homeowners have already lost their homes and underwater homeowners have certainly learned all they are going to learn.  Now we are all just being unfairly punished to keep the real culprits of this crisis from being held accountable at all.

As Lauren explains, “Homeowners trapped underwater threaten the welfare of our society. They cannot sell because they cannot afford to pay the mortgage balance that exceeds any price their houses could command in this market. Stuck in place, they cannot move to cheaper housing, better jobs, or training opportunities.

With so many Americans removed from the pool of potential buyers, those who own their homes with smaller mortgages, or even outright, cannot sell their homes for decent prices, trapping them too in place and forcing some to delay retirement. The low house prices do not even benefit buyers because banks refuse to lend.

Eventually, underwater homeowners will have too little income to make their payments or will give up trying. Further foreclosures will not only drag housing prices down further, but lead to property hazards, fires, crime, and other social costs, threatening the nation’s tranquility.”

Clearly the federal government is not inclined to resolve this issue, but our state governments can…if they are so inclined.