An unorthodox campaign by a handful of cities hardest hit by the housing crash to use the power of eminent domain to write down large mortgage debts has stirred a backlash in Washington, D.C., the Wall Street Journal reported today. Republicans passed in June a budget bill that included language to bar federal agencies from refinancing loans that been seized by cities via eminent domain. The provision would be a poison pill for plans such as one floated last year in Richmond, Calif., to forcibly write down mortgage debt. In New Jersey, two cities, Newark and Irvington, have voted to consider the eminent-domain gambit, and the plan attracted support this summer from council members in New York City. Mortgage bond investors have long opposed the plan, which first surfaced two years ago. Under the plan, the city would purchase the mortgage at whatever a court determines is fair value, and then the city would write down the loan and refinance it through the Federal Housing Administration, which has a program that allows such refinances for borrowers with very little equity. Bond investors say that the plan only works if the city, working with a private firm, can purchase the loan at enough of a discount to refinance into the government-backed loan.
