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More than six years since the housing bubble burst in 2007, over twelve million homes nationwide remain underwater––one out of every five homes with a mortgage. These homeowners are more likely to default on their mortgage payments because the overall principal value of their mortgages is greater than the value of their home. Being underwater limits an individual homeowner’s ability to recover from financial shocks, such as job loss or reduction in income, and at an aggregate level, it threatens another wave of foreclosures. Further, securitization of residential mortgages has inhibited refinancing, even when advantageous to all stakeholders.
This Note evaluates a proposal that aims to overcome a collective action problem between borrowers, lenders, mortgage servicers, and government actors by recalibrating the value of underwater mortgages. Using the power of eminent domain, local municipalities would seize underwater mortgages from private-label securitization trusts, compensating the trusts with the true fair market value of the mortgage (which, by definition, would be less than the current home value). The municipalities, in conjunction with a venture capitalist fund, would refinance the mortgage with a government-approved vendor at a value closer to the true market price. This proposal would likely survive a constitutional challenge and should be piloted in communities burdened by trillions of dollars of household debt.
The author would like to thank Professor Michael Heller for his guidance and comments. The author would also like to thank Jonathan and Toby Schaffer, Zachary Schaffer, and Daniel Sartori for their unwavering support and patience during this process, and always. Many thanks to the Columbia Business Law Review editorial staff for their dedication in preparing this Note for publication.