Robert Hockett,
It Takes a Village: Municipal Condemnation Proceedings and Public/Private Partnerships for Mortgage Loan Modification, Value Preservation, and Local Economic Recovery, 18
Stan. J. L. Bus. & Fin. (forthcoming 2012) available at
SSRN.
It is quite rare to come across a law review article that offers not only a theoretical diagnosis of a major socio-economic problem but also a plan for solving that problem in practice. Putting forward a real, well-reasoned, and detailed policy proposal is always an act of scholarly courage, which inevitably exposes the author to all kinds of criticism. This is especially true where the proposal targets a complex issue in which stakes are high, arguments are heavily ideology-driven, and powerful special interests dominate the agenda. Robert Hockett’s recent essay takes on precisely such a controversial issue: the nation’s continuing problem with underwater mortgages. Since it was posted on SSRN several months ago, this essay has been making serious waves in policy-making circles (and earning its author no love from Wall Street).
Hockett starts with an incisive diagnosis of the root causes and structural dynamics of the mortgage crisis plaguing the nation since 2007. Five years after the bursting of the latest real estate bubble, mortgage debt overhang continues to be one of the primary factors impeding broad economic recovery in the U.S. and, consequently, globally. As Hockett argues, underwater mortgages – or loans on which the homeowner owes more than the current market value of the house – function as the principal drag on the U.S. housing market and the entire economy. Homeowners whose mortgages are underwater default at accelerating rates, leading to mass foreclosure, property degradation, and consequent asset devaluation. Moreover, such homeowners also don’t spend their money on purchases of goods, which depresses the consumer demand that is so vital to a robust economic recovery. According to Hockett, as of the beginning of this year, nearly a quarter of all mortgages in the U.S. were underwater, with an even higher concentration of underwater loans in certain especially hard-hit counties and cities. In effect, these are the loans that, while not technically in default, teeter on the edge of the abyss – and the more of them fall, the wider that abyss gets. Hockett argues that the only practical long-term solution to this problem is to write down the principal on underwater mortgages to post-bust market value levels. That would effectively force the necessary adjustment in asset values and erase the crippling legacy of the pre-2007 real estate bubble. Continue reading "An Unexpected Remedy: Eminent Domain as a Potential Solution to the Mortgage Crisis"