In an effort to combat the city's problems with underwater mortgages, Chicago is considering an eminent domain approach.

Hot on the heels of a proposed eminent domain plan in San Bernardino County California, the city of Chicago is considering a similar plan for underwater mortgages in Cook County.

Eminent domain is a little-mentioned government power that allows it to seize property with fair compensation to the owners, as long as it benefits the public good. Though normally used for land and housing, the current housing market’s mortgage ills have motivated some analysts – such as heavy-hitter Robert J. Shiller – to advocate for the policy.

According to city council documents, Alderman Edward Burke, chairman of the city finance committee, called for an official hearing on eminent domain. According to a HousingWire article on the matter, Mortgage Resolution Partners, a venture capital firm, is pitching the idea to a number of cities across the country.

Here are some other details:

• 44.5 percent of the homes surrounding Cook County are underwater, according to the council documents.
• Since the housing bubble burst, local homeowners have lost more than $37 billion in equity, and Chicago has tried a number of approaches to address that.
• As the council documents describe it, the current proposal in California involves using eminent domain powers to purchase underwater mortgages, write them down to fair market value and then write a new mortgage with “a much reduced principal and monthly payment.”
• “The plan recognizes that the best way to keep troubled homeowners in their homes is by reducing the principal on their mortgages, thus lowering their debt burdens and more closely aligning their mortgages with the true value of their homes,” the document states.

Such a policy, the document concludes, could “save homeowners substantial money, reduce the risk of foreclosures, help people remain in their homes, and revitalize our local economy,” because, as it states, “renegotiation of underwater mortgages by the private sector has been nearly nonexistent.”

Vince Milito, the president of the Staub Milito Group at Coldwell Banker, said eminent domain is an incredibly complex topic, and one prone to unintended consequences.

“It’s a potentially dangerous thing,” he said, adding such an approach could incentivize some homeowners to manipulate their mortgages, qualify for reductions, and get away with a lower principal and monthly payment. And furthermore, homeowners with “real hardships,” as he put it, would be unlikely to retain their homes with a new mortgage; such is their inability to pay that even with a reduced principal, they would still default.

Milito said the distressed market has been looking better in recent months, and without any government regulations or policies, which is how he sees the market ultimately recovering.

“Some of this stuff has to clean itself up without government regulation,” he said. “I don’t think they’re going to be able to fix it.”

And any burdensome government policy could risk delaying that natural cleansing, and a 12-month process would suddenly become a 24-month process.

So what’s your take? Does history tell us that such approaches are necessary, or will such policies get in the market’s way?