Local Governments Consider Eminent Domain To Seize Underwater Mortgages

SACRAMENTO (CBS13) - The federal government has tried, now local cities are stepping up and trying to help struggling homeowners.

"I drive for the county through the residential neighborhoods and all the properties that are vacant and no cars out, it's pretty disgusting, it's sad," said Patrick Kempton, Natomas resident.

That's what local governments are trying to prevent.

Some leaders from Sacramento to Berkeley, and down to Southern California, are look into a new and highly controversial idea.

They want to use eminent domain to seize underwater mortgages from banks, sell them to private investors, refinance at the current market value and substantially slash the amount borrowers owe.

"I don't think that's right. The vacant properties, maybe, but if people are…why? Why would they be doing that?" said one Natomas woman.

Cities and counties say it would lessen the drag on the economy caused by foreclosures, but opponents say the plan will only help those still making payments, not people already on the brink of losing their homes.

"They target borrowers who are current on their mortgage; and really, it's an attempt to make a profit on loans that are not threatening local economies," said Dustin Hobbs, California Mortgage Brokers Association.

The banking industry also says the buy-out could end up hurting local economies instead of helping.

"It has the ability to shutdown lending in that area, because you add on risk to every loan being made," said Hobbs.

Banks and mortgage companies are also threatening legal action to vet the constitutionality of the plan, but some business experts say it's not much different than the federal government bailing out banks.

Why can't local governments bail out homeowners?

"If you look at the government bailing out Fannie Mae and Freddie Mac, it's one place where the government have stepped in, in a big way," said Sanjay Varshnay, Sacramento State School of Business.