Federal Reserve Advocates Use of Eminent Domain for Private Gain

June 19, 2013

The Federal Reserve has spent trillions of dollars trying to revive U.S. housing prices, and at long last a recovery is underway. So it's more than a little surprising that amid this progress the New York Fed would suddenly lend its intellectual "credibility" to a dubious proposal for government to use eminent domain to seize underwater mortgages, says the Wall Street Journal.

Yet there it was recently on the New York Fed website: "Paying Paul and Robbing No One: An Eminent Domain Solution for Underwater Mortgage Debt," a research paper by Cornell law professor Robert Hockett.

  • Hockett notes with alarm in the paper that home prices "still linger close to 30 percent below peak levels," and he warns that government must act to keep pushing prices back up.
  • He wants politicians to identify mortgages worth more than the homes, seize them via the power of eminent domain out of private trusts, refinance them with government help, repackage them into new securities, and sell those securities to new investors.
  • He muses that the money to buy the mortgages could come from the feds (that is, taxpayers) or "private investors" or both.
  • This might please underwater borrowers who would immediately pay less for their loan, and the politicians would take credit for the windfall. But the not-so-free lunch would be financed by the original mortgage investors, who would suffer losses without recourse.

There's also the issue of higher interest rates for future borrowers as lenders price this new political uncertainty into mortgage contracts. Eminent domain is supposed to only be used for public purposes, with adequate compensation to the private parties whose assets are seized, but in this case government would seize private assets (with uncertain compensation) for someone else's private gain.

Source: "The Fed's Eminent Mistake: A Plan to Seize Private Mortgages, Courtesy of the Private Beneficiaries," Wall Street Journal, June 11, 2013.

 

Browse more articles on Government Issues