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Megan McArdle

Stupid Scheme on Eminent Domain Meets Predictable Fate

Like most end-runs around judges and regulators, the plan to use eminent domain to seize mortgages ran into a brick wall.

Last week I wrote about an innovative but dubiousplan put together by a venture-backed financial firm to have cities use their eminent domain power to seize mortgages at below the value of the collateral, sell them to owners at a slight markup and thereby solve the problem of underwater mortgages in their community by handing mortgage bond investors a big loss -- not to mention giving Mortgage Resolution Partners LLC, the firm who thought this up, a nice fee.

The idea had so many problems, legal and otherwise, that I didn't even get to touch on all of them. For example: The Internal Revenue Service usually treats debt forgiveness as taxable income. What happens if this innovative financing plan triggers a tax bill of tens of thousands of dollars for the homeowner?