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Eminent Domain: Can It Fix The Housing Market?

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It's been nearly six years since the housing bubble burst but the aftermath of the crash continues to wreak havoc in the towns and cities most affected by the destruction.

Home prices have yet to stabilize and foreclosures remain an acute problem for homeowners, banks and mortgage servicers. The housing market's troubles have dragged down economic growth and stymied an economic recovery.

Steven Gluckstern, chairman of San Francisco-based Mortgage Resolution Partners, believes he may have the answer for the country's housing problems.

Using three California communities in San Bernardino Valley as a microcosm of the broader housing market, his venture capital firm wants municipalities to seize troubled mortgages in the name of eminent domain. The communities would refinance these mortgages at rates that reflect the current property value of the home and then resell the mortgages back to the troubled homeowners at a lower rate. This program would apply to homeowners that are underwater on their mortgages, or those who owe more than their houses are worth.

Real estate information provider CoreLogic projects that almost 43 percent of homes in San Bernardino County were underwater in April. Sixteen million homes across the U.S. are estimated to be underwater and homes with second mortgages are twice as likely to be underwater.

Gluckstern says his proposal directly benefits the homeowner.

"This is a program that's designed to help communities deal with underwater mortgages by using eminent domain to acquire the mortgages that underlie these houses," he says in the accompanying video. "The objective of the program is to keep [homeowners] in their homes. [We] use the power of eminent domain to take the underlying mortgage and then restructure it for that homeowner in a way that's much more appropriate given today's environment."

This controversial initiative has caught the attention of the mortgage industry and investor and bank lobbying groups including the Securities Industry and Financial Markets Association. Critics argue that using eminent domain to seize and restructure underwater mortgages would be costly to homeowners, make future mortgages more expensive, bring losses for public pension and 401(k) plans and could be unconstitutional. Gluckstern disagrees.

The proposal is "absolutely legal," he says. "The vast bulk of mortgages in this country are owned by trusts. Trusts that are run by trustees and services. Not by banks. It would be the trusts that would be giving up the mortgage and be paid fair value for it."

Whether Gluckstern's plan will be given the green light in California could be determined this summer. Gluckstern says his firm will submit its proposal to San Bernardino officials, and if accepted, the plan could go in to effect before year's end.

The White House has not officially commented on Gluckstern's proposal but according to a report in The Wall Street Journal, the Obama administration is "skeptical" that seizing mortgages by eminent domain is the savior the housing market desperately needs. Gluckstern's plan does not involve government funds but his firm does charge a $4,500 fee for every mortgage that it restructures.

Tell us what you think! Is Gluckstern's plan the answer to the country's depressed housing market?