Bondholders See Eminent Domain as State Attack: Mortgages

Bond investors who will be needed to reduce taxpayers’ role in U.S. mortgage lending have a new reason to stay away: the threat of outright confiscation by local governments.

A plan under consideration in San Bernardino County, California, would use a local government’s eminent domain authority to confiscate and write down mortgages for borrowers who are underwater on their loans, meaning they owe more than their houses are worth. The plan would raise borrowing costs and deter private lenders from returning to the $10 trillion mortgage market, according to bond buyers such as Pacific Investment Management Co. and AllianceBernstein LP.