With Richmond, CA's plans to use eminent domain to "help" underwater homeowners still ongoing (as suits from mortgage-backed securities owners such as PIMCO, Blackrock, and DoubleLine having been initially dismissed), it appears the "wealth transfer" scheme is gaining traction around the nation. As we warned it would, the appeal of this "bailout" - with no thought to the unintended consequence of crushing an entire investing class out of the market (and its implicit rate-increasing result) - is just too strong for local government and sure nough New Jersey town Irvington is moving in that direction. As AP reports, Irvington's plan would focus on using eminent domain to purchase so-called "private label" security mortgages, or ones that are not backed by the U.S. government.

Via AP,

Irvington, N.J., is moving forward with plans to become the second municipality in the nation to use eminent domain to buy mortgages that are in foreclosure.

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"When you hear those words, it usually has a negative connotation," Smith said. But, when used to take control of underwater mortgages the city will "recast it so people can stay in their homes."

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Richmond, Calif., announced plans to use eminent domain to help underwater homeowners earlier this year and a lawsuit challenging the practice was dismissed by a California district court judge in September. Richmond has not yet used eminent domain.

Smith said Irvington's plan would focus on so-called "private label" security mortgages, or ones that are not backed by the U.S. government.

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Smith said the city needs a third party to come in and actually buy the mortgages.

According to Cornell University law professor Robert C. Hockett, eminent domain is one of the few tools available to take over and write down an underwater mortgage because it gives municipalities the power to circumvent mortgage contracts, acquire loans from bondholders, write them down and give them back to the bondholders.

"Some government instrumentality is going to have to do this," said Hockett, who helped create the approach. "No private actor can get around the contracts, but a public actor can."