Broadly, eminent domain is a process by which a governmental entity appropriates private property for public use. In the United States, the last clause of the US Constitution, commonly referred to as the Takings Clause, states: “…nor shall private property be taken for public use, without just compensation.”
While the “just compensation” aspect of the Takings Clause has been largely understood to require the government to pay compensation to the private property owner according to the fair market value of the property at the time of the taking, or the diminution in value in proportion to the taking, the clause regarding “public use” has been much more contentious.
The Supreme Court has long deferred to States to adequately define what a public use is in their jurisdictions. (The 5th Amendment is applicable to the States via the 14th Amendment’s Due Process Clause dating from an 1896 case of rational basis standard of review by the courts.
A more modern and common application of a sovereign’s imminent domain powers is when the governmental entity takes “blighted” land seeking a redevelopment that will increase its beneficial use. Often this takes the form of taking slums and inner city areas that are ridden with crime, razing all standing buildings and constructing new structures for occupation by residential and commercial tenants, as was the subject of the case of Berman v. Parker (1954), seeking to eliminate slums in southern Washington D.C.
While this has been a more normal application of the eminent domain powers, the Supreme Court in 2005 greatly expanded the power of a government authority seeking to use the Takings Clause in Kelo v. City of New London. The City of New London took private homes in good condition and transferred them a private property developer as part of a local development project. The homeowners argued that the City was without authority to do so because the use intended was not a public use, as required under the 5th Amendment. The Court held the action as a proper application of the City’s eminent domain power because the taking was for a public benefit, in that the entire community would benefit from the economic development project.
The central business transaction feature of the exercise of eminent domain is that once the governmental entity takes the property, and pays just compensation at the market rates and then transfers the property to a private developer to build and market the newly constructed spaces. Of course, the private developer pays the government for the land but predictably the payment to the government reflects the fair market value of the property at the time of the taking because that is the most reliable market data. To use a market value of the property after development as a basis of payment for the grant is seen as too speculative and remote.
Often this results in a windfall for the developer because it often gets often prime inner city or waterfront property very cheaply. Thereafter, it can raze, develop and gentrify the area, and thereby increase the value of the land by an order of magnitude. Governmental entities are happy to use their powers this way because after development, property tax revenues to the city increase, crime is reduced thanks to an ejection of low income undesirables.
It is no wonder that many of these projects are fraught with corruption as developers seek to exploit a business advantage thought back room deals with politicians where they get land on the cheap and can flip it for big profit. The primary complaint with eminent domain is not its theory in law that a sovereign has ultimate say over the property that makes up its territory, is that its process and application is heavily laden with opportunities and incentives for private interests wrongfully influence public decisions on property development schemes. The public furor at the public theft of land and grant to a private developer after the Kelo decision was so great that the federal government and some states passed laws that would prevent the use of the takings clause to further economic interests of other private parties.
The usual suspects challenging the use of eminent domain actions have been the individual landowners as “holdouts” standing in the face of bulldozers, or low income tenants thrown out on the streets with their belongings with nowhere else to go. The latest attack on eminent domain as a governmental tactic comes now from the most unlikely of sources. Never would you see a suit and tie seeking the sympathy of the zoning board or the court of public opinion. Not until now.
Faced with Ontario and Fontana have been reviewing a plan to use their powers of eminent domain to buy up “underwater” mortgages in an effort to keep Californians in their homes. Mortgages private contracts between a lender, such as bank or financial institution, and a borrower, such as homeowner where in exchange for advancing the purchase price, the lender takes a security interest in the property. In the event that the borrower fails to make payments to the bank, the bank may exercise its right to take the property by instituting a foreclosure action.
Recently, banks have been all too willing to institute foreclosure actions, and similarly unwilling to renegotiate or refinance the loans homes. Many of these homes would sell for less than the outstanding amount of the mortgage to be paid, hence are commonly referred to as walked away.
Since many city council members, like the general public, believe that big banks and big finance were reckless in providing loans that ratcheted up property values to unsustainable levels and causing a property bubble. When it burst, it is also commonly believed, these are the same financial institutions that were saved though the largest government sponsored bail-out of private industry that has occurred in the history of the United States.
With their backs against the wall and exacerbated by the robo-signingallegations of foreclosure process the cities of Ontario and Fontana are now contemplating using their powers of eminent domain to purchase the private property mortgage contracts for public use. The cities have stated that the homes standing empty blight the city and something needs to be done to prevent further erosion of the communities and ultimately the tax base.
Defended by a representative of the Securities Industry and Financial Markets Association before a public meeting called by the cities on the subject of using eminent domain powers in this way, Wall Street and big finance threatened that the use of eminent domain would hurt borrowers in the area more than it would do them good. Presumably, banks would punish borrowers in Southern California by withholding access to capital if their elected officials proceeded with the plan to give compensation at market rates for these mortgages.
In effect, the plan to purchase mortgages simply forces the banks to accept refinancing to match what homes would sell for on the open market. Given that popular sentiment is that big finance was reckless in its lending, got bailed out, and now is unwilling to give concessions to the masses who have to foot the bill for their bail-out and pay their inflated mortgages on top, it seems a bit disingenuous that banks would now reject a constitutionally mandated fair deal, and go even further to punish a whole swath of potential borrowers who at the end are their potential customers.
The case against eminent domain has historically been up to now advocated by homeowners, with freeways running through their front yards, and environmentalists chaining themselves to trees. It must always be remembered that big finance is waiting in the wings and backing property developers pushing for projects through for their own interests in the guise of public benefit. Financial institutions have a direct interest too; they put the money up for the purchase price, construction costs, and often have a stake in the final sales as primary investors in property development schemes. Simply put, banks make no money of homes ad projects that are completely paid off, so like in Kelo, it is better to seize them under the rubric of public benefits inuring from economic development.
The tables have turned. The banks and financial institutions, as owners of the private property contractual right to receive mortgage payments – a bona-fide stick in the bundle of property rights – are now brisling up against a government program that for 200 years had worked to their advantage.
Somehow it is hard to feel sympathetic to their cause: is it really unjust compensation that homeowners pay what their homes are worth? The case against eminent domain has entered a new and very different domain – big finance’s back yard.