Eminent domain as a bailout

Some local governments in southern California are considering using eminent domain to condemn “underwater” mortgages, so as to allow people who bought houses they can’t afford to continue living in those houses; the whole scheme funded with money raised by yet more government indebtedness. As long-time PLF friend Gideon Kanner explains on his blog, the scheme carries more risks than might at first appear. But it’s likely that courts, at least in California, would allow it. Under the 1982 case of City of Oakland v. Oakland Raiders, the state can use its eminent domain power to condemn even abstract, contractual property like a football franchise. And the U.S. Constitution’s protection for the right of contract has never been held to prohibit the use of eminent domain to take a contract away. Of course, if a court rules that the compensation is inadequate, that would be a different matter—or if the courts found that the bonds had been issued illegally. But, sad to say, under the Kelo decision and California Supreme Court decisions expanding the power of eminent domain, private property—including the mortgages that banks rely upon to maintain their solvency—is largely held at the whim of elected officials.