Robert Hockett Paper on Using Eminent Domain to Solve the Mortgage Overhang

 

Robert C. Hockett

 of Cornell has written It Takes a Village: Municipal Condemnation Proceedings and Public/Private Partnerships for Mortgage Loan Modification, Value Preservation, and Local Economic Recovery. The paper was also discussed in Robert J. Shiller's Economic View column in the Sunday Times.  Here's the paper's abstract:

Respected real estate analysts now forecast that the U.S. is poised to experience a renewed round of home mortgage foreclosures over the coming 6 years. Up to 11 million underwater mortgages will be affected. Neither our families, our neighborhoods, nor our state and national economies can bear a resumption of crisis on this order of magnitude.

I argue that ongoing and self-worsening slump in the primary and secondary mortgage markets is rooted in a host of recursive collective action challenges structurally akin to those that brought on the real estate bubble and bust themselves. Collective action problems of this sort require duly authorized collective agents for their solution. At present, the optimally situated such agents for purposes of mortgage market clearing are municipal governments exercising their traditional eminent domain authority.

I sketch a plan pursuant to which municipalities, in partnership with investors, can condemn underwater mortgage notes, pay mortgagees fair market value for the same, and systematically write down principal. Because in so doing they will be doing what parties themselves would do voluntarily were they not challenged by structural impediments to collective action, municipalities acting on this plan will be rendering all better off. They will also be leading the urgently necessary project of eliminating debt overhang nationwide and thereby at last ending our ongoing debt deflation.

Comments

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Great post! I wish the news was as great as this post. Its quite scary that the foreclosure forecast projects 6 more years of foreclosures and 11 million underwater home will face mortgage issues. I hope to see more developments in the foreclosure crisis. Hopefully we can find innovative ways to prevent some of these foreclosures. Thanks for your post.

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It's frightening both for people and for banks to enter new mortgages. But, their is not really what to do about it, since people need homes and mortgage is one of the services given by banks. Just lets hope that the crisis is behind us.

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