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Eminent Domain Takes Root in Areas with High Unemployment, Poverty

Plummeting home values across the country left many homeowners owing more on their mortgage than their home was worth, and although rising prices have lifted millions to positions of positive equity, ""one in five mortgage borrowers"":http://dsnews.comarticles/negative-equity-new-way-of-life-in-recovery-2013-11-22 remains underwater today.

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To address widespread negative equity in their local communities, at least 15 cities and counties are considering using eminent domain to seize underwater homes from lenders and investors and lower borrowers' mortgage principal balances, according to the ""Urban Institute"":http://www.urban.org.

San Bernardino County in California was the ""first municipality to explore the concept"":http://dsnews.comarticles/san-bernardino-county-considering-use-of-eminent-domain-to-rescue-underwater-homeowners-2012-06-29 of using eminent domain to combat negative equity with a plan that involves first attempting to purchase underwater loans from the mortgage holders but at an amount below the borrower's original debt obligation and closer to the current fair market value.

If the mortgage holders refuse to eat the losses on these loans, the local government would invoke eminent domain based on the argument that such authority would prevent foreclosures and ensuing blight. The city, through its investment partner, would then refinance the loans with new terms reflecting the property's current value.

Faced with the possibility of costly lawsuits from the lenders and investors impacted as well as warnings of the impending impact such action would have on industry participants' willingness to do business in San Bernardino, county officials abandoned the idea in January.

Since then, a number of other cities and counties have taken up the proposal, including the California cities of Richmond, El Monte, Fontana, Ontario, Pomona, Salinas, and Stockton, as well as North Las Vegas; Chicago; Wayne County, Michigan; Brocton, Massachusetts; Suffolk County, New York; and Newark and Irvington, New Jersey.

The Urban Institute recently conducted a study to see what commonalities are shared among these 14 communities, as well as San Bernardino County.

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Researchers examined American Community Survey data from 2007 to 2011 and found that all 15 communities suffer from high levels of unemployment and poverty, stagnant incomes, low housing prices, and high shares of cost-burdened homeowners.

Except for Suffolk County, all of the municipalities had unemployment rates over the five-year examination period that exceeded the national average, reaching into the mid-teens, according to the Urban Institute's Pamela Lee, author of the report on the research findings. Unemployment ranged from 10.4 percent in North Las Vegas to 17.4 percent in Wayne County, which is double the national rate, Lee explained.

In six municipalities--El Monte, Salinas, Stockton, Chicago, Wayne County, and Newark--more than a fifth of the residents live below poverty level. The study also showed that median household income increased in only four communities; among those, Ontario, Stockton, and Newark saw increases of just 2 percent or less (Fontana's median income rose 7 percent). In Suffolk County, real incomes dropped by 21 percent, and in Wayne County, the decline was 39 percent.

The researchers tracked residential home price changes from 2006 through 2013 and compared all the cities that have considered the eminent domain plan against the counties and states in which they reside. The data indicate none of the municipalities have recovered as well as the nation overall, according to Lee. In addition, none are improving as well as their home states, and nearly all lag behind their counties' price recoveries.

In nearly all 15 municipalities, more than 40 percent of mortgaged homeowners are putting more than 35 percent of their income toward their monthly mortgage payments and additional costs associated with homeownership. The only exception is Wayne County, where 32 percent of borrowers are committing more than a third of their incomes to housing costs--still above the national rate of 29 percent.

""The cities and counties that have considered eminent domain are, in essence, pockets of distress left behind as the tide of the recession gradually pulls back,"" Lee said.

""The negative indicators shared by municipalities that have considered the eminent domain solution indicate that their shared problems extend beyond housing. These cities have traditionally suffered from lack of investment, high crime rates, concentrated poverty, and other general barriers to opportunity,"" Lee wrote in the research report. ""These factors contributed to their poor performance during and after the housing crash, and the relief efforts to date, both from lenders and policymakers, have been modest relative to the scale of the problem.""

About Author: Carrie Bay

Carrie Bay is a freelance writer for DS News and its sister publication MReport. She served as online editor for DSNews.com from 2008 through 2011. Prior to joining DS News and the Five Star organization, she managed public relations, marketing, and media relations initiatives for several B2B companies in the financial services, technology, and telecommunications industries. She also wrote for retail and nonprofit organizations upon graduating from Texas A&M University with degrees in journalism and English.
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