Don’t Count on Eminent Domain Saving You From an Underwater Mortgage

Our neighbor to the west, California, was not spared from the housing bubble. Some areas, particularly the Inland Empire, which consists of municipalities east of Los Angeles in Riverside and San Bernardino counties, were very hard hit. As one might expect, this region encountered the same problems that many Las Vegas homeowners have: underwater mortgages, lost work, and slashed city services. The residents used a combination of short sales, deeds in lieu of foreclosure, and bankruptcy, but according to The New Yorker, twenty percent of the regions mortgages are still underwater.

One idea by entrepreneur Steven Gluckstern is to use municipalities’ eminent domain powers to clear up the mess. Cities can legally take people’s property for public use so long as the owners are compensated. Instead of taking people’s houses for building a school, freeway, or hospital, though, the plan was to take the mortgages from the banks for compensation, and then issue a new mortgage at the market value of the home. In other words, rather than try to negotiate a settlement with the banks as the federal government has tried to do, the proponents would use their legal authority to do so instead.

Unfortunately, the banks did not climb aboard, and the Joint Powers Authority formed between San Bernardino County and two of its cities, Ontario and Fontana, voted it down according to the Los Angeles Times.

How the municipalities would have generated the income to pay off the forgiven principal is unclear, but banks are clearly too risk averse to acquiesce to a forced sale of their mortgages, even if it means getting paid now rather than possibly facing a canceled mortgage deficiency in bankruptcy.

As of now there is no news of Las Vegas or its surrounding municipalities contemplating using eminent domain powers to relieve homeowners. As a result, if you are underwater on your mortgage and are behind on your payments, you’ll have to use conventional legal mechanisms to deal with your financial situation. Talking to an experienced Las Vegas bankruptcy lawyer can help you learn what those options are.

For more questions about bankruptcy in Las Vegas, please feel free to contact an experienced Haines & Krieger Las Vegas bankruptcy attorney for a free initial consultation. Call us at 1-702-880-5554 to set up your free consultation.

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