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Using Eminent Domain to Write-Down Mortgages: An Economic Analysis

Author

Listed:
  • Thomas J. Miceli

    (University of Connecticut)

  • Katherine A. Pancak

    (University of Connecticut)

Abstract

A 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.

Suggested Citation

  • Thomas J. Miceli & Katherine A. Pancak, 2013. "Using Eminent Domain to Write-Down Mortgages: An Economic Analysis," Working papers 2013-05, University of Connecticut, Department of Economics.
  • Handle: RePEc:uct:uconnp:2013-05
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    File URL: http://web2.uconn.edu/economics/working/2013-05.pdf
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    References listed on IDEAS

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    1. Brueckner, Jan K, 2000. "Mortgage Default with Asymmetric Information," The Journal of Real Estate Finance and Economics, Springer, vol. 20(3), pages 251-274, May.
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    More about this item

    Keywords

    Default; eminent domain; mortgages;

    JEL classification:

    • K11 - Law and Economics - - Basic Areas of Law - - - Property Law
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
    • R38 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Government Policy

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