The Constitutionality of Using Eminent Domain to Condemn Underwater Mortgage Loans

One of the most visible and devastating components of the financial crisis that began in 2007 and 2008 has been a nationwide foreclosure crisis. In the wake of ultimately ineffective attempts at federal policy intervention to address the foreclosure crisis, a private firm has proposed that counties and municipalities use their power of eminent domain to seize “underwater” mortgage loans—-mortgage loans in which the debt exceeds the value of the underlying property—-from the private securitization trusts that currently hold them. Having condemned the mortgage loans, the counties and municipalities would reduce the debt to a level below the value of the property and then sell the new loans to private investors. This Note contends that while the condemnation of “underwater” mortgage loans is likely constitutional under the Takings Clause of the Fifth Amendment to the U.S. Constitution, it would likely not survive an Article I Contracts Clause challenge, despite the moribund nature of Contracts Clause jurisprudence over the last half-century.