Title issues that arise by virtue of the controversial use of eminent domain could impair the sale or insurance of residential mortgage loans but have received scant attention. A city seizes “underwater” loans through eminent domain, waves its magic wand, says Abracadabra or Bibbidi Bobbidi Boo, and then the mortgage lien of the prior loan holder evaporates into thin air. The city is free to write down loan principal and, for a fee, arrange for private interests to refinance the no longer underwater loan for a grateful borrower. In this land of make believe, the prior holder accepts the city’s offer of reasonable compensation without a fight. Yeah, right! The more likely result is that holders of seized mortgages will resort to litigation to stop the governmental seizure of their loans. Regardless of the ultimate outcome of that litigation, the mere filing of litigation could cloud title on the new refinancings and make them unmarketable and uninsurable. Read more to see why.
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