Eminent Domain Used Against Banks

Previously published on Dec 14, 2013

In an almost perverse irony, officials of Richmond, CA decided to use eminent domain to seize underwater properties from banks, so they can directly offer homeowners refinancing. Struggling to deal with an ongoing foreclosure crisis, city officials first offered to purchase underwater properties from various banks at or near their current market value. Because none of these banks had accepted the offers or presented an alternative solution that mutually serves the state interest of economic stability and the banks' interests of recouping their investment capital, the city threatened to use the controversial practice of eminent domain in order to force a solution that keeps homeowners in their homes.

Although eminent domain has always been controversial, businesses have been more blatantly using their influence over local, state, and national governments over the past decade or so to abuse eminent domain in order to force homeowners to sell their properties, sometimes at a significantly lower value than their market value. This is a particular problem for poor homeowners with low valued properties, who cannot afford to move, even when they are compensated. The Castle Coalition, which advocates on behalf of homeowners facing abusive eminent domain practices, features numerous stories on its website, though it is limited in what it can do for those who need help.

Furthermore, the irony of turning the tables on overly aggressive and harmful business practices does not necessarily justify the use of eminent domain in this fashion. Quite frankly, this type of government intervention is a form of a bailout for homeowners, who may have been irresponsible and took on too much risk, that really is not fair to more responsible homeowners. Unfortunately, a great number of public policies are not fair, so the only constructive means of judging such policies is to question whether they serve the broader interests of constituents and those interests can be addressed through a less intrusive approach.

Homeowners struggling to pay underwater mortgages and ballooning adjustable loan rates did agree to the terms of the loans, even if they did not fully appreciate the implications of their decisions. That said, banks also agreed to these loan terms. In fact, these banks calculated a certain percentage of their borrowers would not be able to honor their obligations when they started using these exotic loans while they have aggressively pursued lending to individuals who were likely to default, relying on their ability to resell foreclosed mortgages/properties and collect on defaulted loans to turn a profit through destruction.

In other words, banks set up people for failure and the 2008-2009 Great Recession, which started due to too many foreclosures, overwhelmed their capacity to cope with defaults. Consequently, these banks and their shareholders took on big risks that helped cause great personal and social turmoil while they have yet to offer a meaningful remedy; therefore, Richmond does have a legitimate interest in using eminent domain to force a solution.

Moving forward, it is probably fair to say most Americans would agree with a philosophy that states actors, i.e. people, businesses, etc., should be judged on their behavior and their own beliefs. Big Banks are near perfect capitalist institutions; henceforth, they act solely to secure their perceived interests and suppress the interests of others when those interests conflict with theirs. Banks seek socialist policies like subsidies in the form of taxes breaks and bailouts when they provide a benefit to them, yet oppose paying taxes even when it is in the good of stabilizing the economy.

Accordingly, banks support eminent domain when it is to their benefit and oppose it when it is used against them. Given this thinking, the city of Richmond has every right to use eminent domain against the banks, which have no right to protest as they would, and often do, freely use eminent domain for their own purposes. Meanwhile, it is important to remember banks as corporations are not people and are not guaranteed the same rights as US citizens. In fact, their right to exist inside the United States is dependent upon their adherence to regulations, see the Commerce Clause of the US Constitution, and their value to consumers.

Unfortunately, there are consequences, including legal challenges and economic blowback to using eminent domain against businesses as seen when Richmond could not resell some of its debt, for the use of eminent domain. Big banks have a great deal of leverage in our economy while the city has relatively little. Where Richmond extended its leverage to struggling homeowners in order to solve a growing communal problem, State and Federal agencies will probably need to extend their leverage to Richmond, if the city hopes to be successful in its policies.

Opponents argue this type of action will only hurt residents, because no one will want to invest in an area where government seizes properties from businesses. In many respects, the potential consequences are similar to that of a municipality filing for bankruptcy or expanding regulations. This means local leaders must decide whether the particular interests at stake are worth fighting for. It is likely banks and other special interests groups will do whatever it takes to prevent this precedent from maturing and this could be devastating to the municipality, yet an affirmed authority of municipalities to use eminent domain would add to the leverage of all local and State governments while reminding businesses their existence depends up their usefulness, including whether they constructively or destructive serve state interests.
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