Coming to a market near you: eminent domain

Several cities in California’s Inland Empire, which was devastated by the housing bust, have decided not to wait around for relief from the feds or the banking industry. They are ready to invoke a rarely used power -- eminent domain -- to stop foreclosures in their communities and help struggling homeowners restructure their mortgages.

The banking and securities industry is not excited over the idea.

Fontana and Ontario, two cities in San Bernardino County, were the first to float the proposal. Because of falling property values, approximately half of the homeowners in the county owe more than their house is worth. Unemployment hovers around 12%.

Under the plan, Fontana and Ontario would partner with the county and seize mortgages that are “underwater” using private funds. The “Homeowner Protection Plan” would then lower the amount owed on the house and restructure the payments, according to an article in the Los Angeles Times.

While not officially endorsing the idea, state Lt. Gov. Gavin Newsom, the former mayor of San Francisco, said that the Inland Empire cities should be given the chance to explore the “bold” idea, the Times reported.

The Securities Industry and Financial Markets Association has warned that seizing mortgages through eminent domain is, in all likelihood, unconstitutional. Litigation is almost guaranteed.

Meanwhile, other cities are reportedly contemplating similar eminent domain plans, including Berkeley, Calif., Chicago and Suffolk County in New York.