The Chicago Association of REALTORS® put members of a Chicago City Council committee on notice Tuesday that it was against any proposal that would use eminent domain to acquire mortgages on underwater properties.

In a letter to and testimony before the council's Joint Committee on Finance and the Committee on Housing and Real Estate, Brian A. Bernardoni, senior director of governmental affairs and public policy for CAR (and a government affairs director for the Illinois Association of REALTORS®), said if the policy was implemented it would have serious implications for those seeking home financing.

"We believe use of eminent domain is a poor public policy with serious ramifications for future lending in the city," Bernardoni wrote in the letter to the committees' members.

REALTORS® aren’t alone in their opposition. According to the Chicago Tribune, Chicago Mayor Rahm Emanuel said Tuesday he was against the measure.

The committees are hearing initial discussion on the proposal which is similar to one that suggested as a way to help fix address the foreclosure problem in several hard-hit California communities.

Here's how it would work:

• A city or county government would use eminent domain to take properties that are worth far less than they initially sold for and where homeowners are in danger of slipping into foreclosure. Eminent domain is a legal process which allows a government to take land for public use such as building a highway or creating economic development opportunity.
• The government using eminent domain would then reduce the loan principal on the properties and sell them to private investors.
• Some cities and counties see this as a way to keep homeowners in homes rather than face the prospect of forced vacancies through foreclosure contributing to blight. Under the proposal, homeowners would get to keep their houses and the private investors would make money on the deal as they package and resell the mortgages.
• The losers would be investors currently holding the mortgage-backed securities who would see their assets’ worth decrease. Homeowners seeking to refinance or prospective buyers might find it hard – or impossible – to get loans because lenders would be reluctant to extend credit in areas where they run a risk of having property seized and assets arbitrarily devalued.  

"We agree with a growing number of critics the result will likely cost potential homeowners more money in lending costs and interest," Bernardoni wrote. "We also feel the proposal will make refinancing; in this market, more unlikely and definitely more expensive."

Often, the biggest investors in mortgage-backed securities are pension and mutual funds, so the economic ripple effect would be broad. Not only would existing investors see the value of their assets shrink, but lenders might be unwilling to do business in an area where there was a possibility that the government could step in and seize property.

"A further chilling of yet-to-fully recover housing market in Chicago is not needed," Bernardoni wrote.

The letter notes that transfer taxes in the city of Chicago have plummeted from a high of $242.3 million in 2006 to an estimated $88.8 million in the 2012 fiscal year.

"If lenders do not lend, transaction taxes disappear," the letter warns.

REALTORS® historically are against eminent domain actions. The letter notes that implementing the legal takeover as part of an effort to address foreclosures could be construed by the courts as failing to meet public use requirements and standards for fair compensation for the original property owners.

“… We believe it will deeply impact mortgage lending in a general sense, and further erode property rights by establishing a new conceptual definition of eminent domain,” the letter states.

Brian Bernardoni is the Illinois Association of REALTORS® local Government Affairs Director (GAD) representing the Chicago Association of REALTORS® and the West Towns chapter of the Chicago Association.