Monday, July 23, 2012

Mortgages, Eminent Domain, the Police Power, and the Right to Housing

Since its appearance several weeks ago in early July, more and more attention is being focused on the perfectly legal plan of the people of the City of San Bernardino, California, to use their eminent domain power to bail themselves out of their disproportionate debt to their mortgagees (the banks).

As more and more people in San Bernardino are unable to make their mortgage payments - paying far more to the banks, it should be noted, than their homes are even worth - more and more mortgages are being foreclosed upon. As more and more people are being evicted from their homes following foreclosure sales, the increase in the vacant houses entering the housing market is further decreasing the value of those people's homes who aren't facing such crises. In addition to this consequence, one sees the further effect of the vacant homes falling into disrepair, further lowering not only their value but the value of the homes in the community in general. As such, there is an exponential downward spiral of diminishing home values, as well as of living conditions in San Bernardino.

Absent some type of intervention into this devaluation spiral, conditions for nearly all of the people of San Bernardino will only grow worse. Faced with few options, the City of San Bernardino has been considering using its eminent domain power to seize the devalued homes, paying just compensation to the owners of the mortgages. Because just compensation is the market value, rather than the housing-bubble-inflated value, the banks would lose a great deal of their (largely fraudulently derived) money should this plan come to pass. The city would then remortgage these homes at fairer, market values, allowing people to remain in their homes and correcting the exponential spiral of home devaluation.

One large question looms. How would the City of San Bernardino obtain the money to pay just compensation/market value to the banks for all of those homes? The answer is that the City of San Bernardino would borrow the money from a firm called Mortgage Resolution Partners. As a for-profit business, MRP are involved out of an interest in making a profit off of the whole affair. To be sure, using eminent domain to remortgage the homes was MRP's idea in the first place. It was they who approached the City of San Bernardino with the plan, selling it to them as a way to help the city out of its housing problem. Of course, the City of San Bernardino will have to pay MRP for their help, but in the long run they will wind up paying far less to MRP than to the banks.

While banks and their allies are howling that this is a horrible idea, that it will be destructive to the mortgage market and will damage contracts, raising constitutional issues involving the latter, among other things, those on the other side seem to think the plan to use eminent domain makes a considerable deal of sense and has few downsides. For example, Cornell University Law Professor Robert Hockett, one of MRP's advisers, argues that rather than harming markets, the eminent domain plan is actually a market-friendly way of responding to the issue since it will allow the market to correct itself. "This is actually a pro-market solution," he is quoted as saying in the Los Angeles Times article from July 6.

What appears to be overlooked in this story is the fact that the City of San Bernardino has an even stronger option than the utilization of their power of eminent domain. In some respects more powerful than the state's power of eminent domain is the state's police power. Unlike the power of eminent domain, though, which requires that the city pay just compensation to those whose properties have been seized, under its police power a city may regulate properties if doing so is necessary to protect the public health; and property regulations under the police power require no compensation at all if they are designed to prevent an "injury upon the community."

Because housing is a basic necessity, one which is necessary for people's health, it does not seem to be much of a stretch to argue that preventing deprivations of housing is necessary to protect the public health. And, so, because housing is fundamental to protecting public health, and the manner in which the banks have used their property is injurious to the community, and depriving people of homes is also injurious to the community, a popular government may use its police power to satisfy this public health need, regulating housing in a manner that prohibits evictions. While this could be construed to be a regulatory taking, limiting the banks' "right to exclude" which is a central right of property-holders, because it advances a compelling public interest in providing housing, and because the banks' property is burdened but no actual person's property or health is at all burdened, and because this type of regulation is necessary to prevent further injuries upon the community, it ought to fall within the city's police power to enact such a regulation. While those in possession of a property will be able to remain in possession, however, title will return to the banks. And though evictions from the property will be suspended, the occupants will be in adverse possession of the homes. As such, should the occupants satisfy the full statutory period for adverse possession, clean title can then be reconveyed to the occupants.

Because the public health requires housing, the City of San Bernardino (and not only the City of San Bernardino) ought to assert its police power - rather than its power of eminent domain - and so regulate those properties within its jurisdiction to prevent further injuries to the public health, allowing homes to be available to all. Of course, pursuit of such a path would require a revolutionary posture committed to a radical break from existing social relations.

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