Using Eminent Domain to Write-Down Mortgages: An Economic Analysis
AbstractA handful of economically distressed cities and counties are considering using their power of eminent domain to write down the principal of underwater mortgage loans. Analogous to the condemnation of tangible real estate for public use, the city would “take” intangible mortgage loans from the lenders or investors holding the loans. According to the proposed idea, the underwater mortgage loans would be acquired for less than their stated face value, and then written down, refinanced, and sold to investors. This article reviews the legal basis and economic impact of such government forced write-down and refinancing. We develop a model of negative equity mortgage default both with and without government takings, to determine if the use of 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 costs of increased interest rates. The weighting of this trade-off is impacted by the determination of just compensation.
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Bibliographic InfoPaper provided by University of Connecticut, Department of Economics in its series Working papers with number 2013-05.
Length: 26 pages
Date of creation: Mar 2013
Date of revision:
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More information through EDIRC
Default; eminent domain; mortgages;
Find related papers by JEL classification:
- K11 - Law and Economics - - Basic Areas of Law - - - Property Law
- R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Production Analysis, and Firm Location - - - Housing Supply and Markets
- R38 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Production Analysis, and Firm Location - - - Government Policy; Regulatory Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-03-30 (All new papers)
- NEP-LAW-2013-03-30 (Law & Economics)
- NEP-URE-2013-03-30 (Urban & Real Estate Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Miceli,Thomas J., 2011.
"The Economic Theory of Eminent Domain,"
Cambridge University Press, number 9781107005259, October.
- Brueckner, Jan K, 2000. "Mortgage Default with Asymmetric Information," The Journal of Real Estate Finance and Economics, Springer, vol. 20(3), pages 251-74, May.
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