The once novel concept of using eminent domain to seize underwater assets and re-value them to market prices hasn’t yet been forgotten. The idea has gained enough traction in San Bernardino that it’s launched a national debate over whether governments can and should use their powers to intervene in the credit market.

Proponents of the plan argue that by using eminent domain, governments can effectively re-inject stability into their local housing market. In San Bernardino, where nearly half of all homes are underwater, the idea is attractive and several agencies have joined together to investigate a scheme where they would create and administer a joint powers authority. That JPA would then work with private investors out of San Francisco to repackage and sell the fair-market mortgages.

Opponents say that such intervention into the credit market – in this case the mortgage lending industry – would undermine a trust relationship and permanently damage the region’s openness to credit. In other words, if investors knew that their holdings could be seized and value gutted by a government, there would be greater risk than originally assumed. That could result in future reluctance to lend and invest.

The Federal government has even joined the debate, as legislation has been introduced in Congress that would bar the nation’s four largest real estate investors from purchasing any mortgage that was seized and revalued through eminent domain. The Federal Housing Finance Agency expressed its concerns through a press release, saying that “action may be necessary” to avoid the risk of intervention.

On the other side of the issue are the proponents such as California Lt. Governor Gavin Newsom who has asked that the Justice Department investigate the legality of squeezing off credit in an area due to policies that Wall Street doesn’t agree with.  It’s a policy that Newsom sees as anti-competitive.

Read the full article at the LA Daily News.