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Using eminent domain to refinance underwater mortgages: A welfare analysis

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  • Miceli, Thomas J.
  • Pancak, Katherine
  • Segerson, Kathleen

Abstract

This paper evaluates the welfare consequences of the proposed use of eminent domain to forcibly refinance “underwater” mortgages (mortgages for which the remaining loan balance exceeds the value of the house). Our results show that, in the absence of transaction costs, the policy unambiguously increases welfare, regardless of the amount of compensation paid to lenders. However, when takings generate transaction costs, we show that in a competitive mortgage market where borrowers fully finance the needed compensation through lump sum taxes, welfare is decreasing in transaction costs, but more generous compensation for lenders may either increase or decrease social welfare.

Suggested Citation

  • Miceli, Thomas J. & Pancak, Katherine & Segerson, Kathleen, 2017. "Using eminent domain to refinance underwater mortgages: A welfare analysis," International Review of Law and Economics, Elsevier, vol. 51(C), pages 12-22.
    • Handle: RePEc:eee:irlaec:v:51:y:2017:i:c:p:12-22
    DOI: 10.1016/j.irle.2017.05.001
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    References listed on IDEAS

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    1. R. H. Coase, 2013. "The Problem of Social Cost," Journal of Law and Economics, University of Chicago Press, vol. 56(4), pages 837-877.
    2. Brueckner, Jan K., 2011. "Lectures on Urban Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262016362, December.
    3. Lawrence Blume & Daniel L. Rubinfeld & Perry Shapiro, 1984. "The Taking of Land: When Should Compensation Be Paid?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 99(1), pages 71-92.
    4. Jean Tirole, 2012. "Overcoming Adverse Selection: How Public Intervention Can Restore Market Functioning," American Economic Review, American Economic Association, vol. 102(1), pages 29-59, February.
    5. John Harding & Thomas J. Miceli & C.F. Sirmans, 2000. "Do Owners Take Better Care of Their Housing Than Renters?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 28(4), pages 663-681.
    6. Miceli,Thomas J., 2011. "The Economic Theory of Eminent Domain," Cambridge Books, Cambridge University Press, number 9781107005259.
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    More about this item

    Keywords

    Eminent domain; Just compensation; Mortgage foreclosure;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • K11 - Law and Economics - - Basic Areas of Law - - - Property Law
    • K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law

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