There has been a great deal of discussion surrounding the proposal to use eminent domain as a way of evading proscriptions against principal "cram-downs" (i.e., forced reductions in loans' principal balances). As a non-attorney, I'm not going to venture an opinion on the legality or propriety of the proposed seizure of investors' assets. I do, however, believe that the proposed actions would have a damaging effect on the MBS and mortgage markets, and risks injuring the people who are supposed to be aided.

To summarize, a San Francisco-based firm has proposed to finance the acquisition of underwater loans held in private-label MBS trusts by municipalities using their powers of eminent domain. The loans' current holders would be compensated based on a reduced face value, reflecting current home prices. Homeowners would receive new FHA loans reflecting their homes' current values.

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