American Securitization Forum (ASF) Executive Director Tom Deutsch today testified before Chicago’s joint committee on finance and housing and real estate about a proposal before the committee to use eminent domain to acquire mortgage loans.

In his testimony, Deutsch brought up the legal issues surrounding eminent domain. He said it would result in "time-consuming litigation at the trial level."

He warned Chicago that if it ends up not prevailing on the right-to-take issue, the city might end up being liable for lawyers' fees aside from any other damage caused by the pre-condemnation activity. The program the ASF director said can "result in tens of million of dollars in litigation losses."

The committee is looking at a proposal by Mortgage Resolution Partners (MRP) to utilize eminent domain to seize underwater mortgages. Under the proposal, the city would take the mortgages, reduce the principal and through MRP's and its investors' help, give back new but smaller mortgages to current homeowners.

In late July, ASR sister publication American Banker reported that Chicago's city council had adopted a resolution to explore a plan to use eminent domain. 

“The proposal to use eminent domain to seize underwater mortgages is both bad public policy and unconstitutional," Deutsch said in a statement. 

He added that the plan only covers performing mortgages that probably will not default and provides no help to homeowners facing foreclosure. It will also make new mortgages harder and more expensive to get given that lenders will need to consider the risk of losing their loans via eminent domain.

Deutsch said that the U.S. Constitution permits the use of eminent domain only if it is for a “public use” and not if it means helping a private entity take property for profit.

In his testimony, Deutsch used the example of San Bernardino County's plan to acquire underwater residential properties. He said that the two components of the the county's plan to hand select the best borrowers and paying considerably less than the property's price seem critical to MRP's plan, resulting in "MRP reaping substantial profits for itself and its investors."


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