San Bernardino County in California, one of the areas hit hard by the recent property crash, is considering an innovative proposal to relieve struggling homeowners in the hope of contributing to an economic recovery.
The basis of the plan involves invoking the power of eminent domain, the US equivalent of our compulsory purchase orders. The idea is to stimulate private investment to finance the purchase of some suitable mortgages. Once bought, the principal would be cut and the repayment terms would be eased. How this helps the homeowner is obvious, but it is also hoped that the local economy will benefit from increased spending by the now less-constrained householders.
However, this proposal has been criticised on several grounds. First, only mortgages with up-to-date payments will initially be considered for purchase, thereby doing nothing for the most troubled households. The second major concern is that credit will be less forthcoming in future in the areas where the scheme is implemented, and that house prices could fall even further. A related worry is that investors in mortgage securities will demand higher interest rates, or even abandon the market entirely. So while this scheme has its merits, it may be a non-starter.