Calif. City Looks to Seize Loans to Ease Mortgages

A Acquired Realty & Investments Inc. for sale sign hangs in front of a foreclosed home in Lake Worth, Florida, U.S., on Wednesday, March 30, 2011. Letting homeowners unload properties for less than their mortgage debt may stem home-price declines by preventing foreclosures, which drag down overall values by selling at discounts. The problem is short sales are rising at about half the pace of home seizures as a lengthy consent process by loan holders deters potential buyers. Photographer: Mark Elias/Bloomberg via Getty Images
Mark Elias/Bloomberg via Getty Images

SAN FRANCISCO -- When the mayor of Richmond, Calif., and a gaggle of activists and homeowners showed up at the Wells Fargo Bank headquarters in downtown San Francisco this month, they were on a mission to speak with the bank's chief executive.

They wanted the bank to drop a lawsuit aimed at stopping Richmond's first-in-the-nation plan to use the government's constitutional power of eminent domain to "seize" hundreds of mortgages from Wells Fargo and other financial institutions.

As Mayor Gayle McLaughlin and the plan's backers approached the bank building, security guards locked the doors. After a bank official told her there would be no meeting then and that someone would call her later, she grabbed a bullhorn.

"I am absolutely not backing down," McLaughlin said, as curious tourists and lunching office workers milled about.

Wells Fargo (WFC), three other banks and even the Federal Housing Finance Agency think otherwise.

The banks have filed two lawsuits alleging that the plan is an illegal abuse of eminent domain, which allows governments to seize private property for public use -- such as a house in the path of a new highway or a piece of land needed for a new park.

The banks argue the plan would "severely disrupt the United States mortgage industry" because many other cities would likely adopt the same program to help homeowners who owe more on their mortgages than their houses are worth.

So far, Richmond has sent out more than 600 offers, but hasn't yet begun any eminent domain proceedings. Newark, N.J., North Las Vegas, Nev., El Monte, Calif., and Seattle are considering similar plans, according to Wells Fargo's lawsuit.

While the housing industry is recovering slowly, Richmond, a city of roughly 100,000 people, is in the middle of a housing crisis, as plummeting home values and rising crime has left many worried that an era of urban blight is upon them.

McLaughlin said cities are considering the program because they are desperate. Nearly half the mortgages in Richmond, for example, are "underwater," the owner owes more than the house is worth.

McLaughlin is a Green Party candidate who beat back opposition from the city's police and fire unions to win a second term in 2010. She said she fears homeowners will begin to abandon their homes, leading to blighted neighborhoods and the draining of public coffers to the point of municipal bankruptcy experienced by Stockton, Calif., and Detroit.

"The city is stepping in where Wall Street and where the federal government have been unable or unwilling to do so," she said.

The plan is the brainchild of Cornell University law school professor Robert Hockett. "The fact of the matter is that underwater loans do default at massive rates," Hockett said. "Underwater loans are a major drag on the economic recovery. We have got to do something."

Here's how it works:
  • Richmond, working with San Francisco-based Mortgage Resolution Partners, offers $150,000 to buy a $300,000 bank loan on a house that is now worth $200,000 and is in danger of foreclosure.
  • If the bank agrees, the city and the company then obtain the loan at $150,000. Richmond and the company then offer the homeowner a new loan of $190,000, which, if accepted, lowers the monthly payments and improves the owners' chances of staying.
  • In such transactions, the company receives $4,500 for each completed sale and splits any additional profits with the city.
  • If the bank refuses to sell the loan to Richmond, then the city invokes its power of eminent domain and seizes the mortgage. It would then offer the bank a fair market value for the home.
  • Mortgage Resolution Partners, the company partnering with the city, puts up the money and had promised to pay all Richmond's legal costs. City officials haven't said how many homes they hope to refinance through eminent domain.
Federal regulators said eminent domain isn't the answer. The Federal Housing Finance Agency said plans to seize loans "present a clear threat to the safe and sound operations Fannie Mae, Freddie Mac and the Federal Home Loan Banks."

Tim Cameron, a Washington, D.C., lobbyist with the Securities Industry and Financial Markets Association, said there is more at play than a single person's underwater loan.

Cameron said pension funds, banks and other groups that made loans in Richmond stand to lose millions if the city is allowed to use eminent domain to force lenders into accepting less than the original terms of the loan.

He also predicted that cities using eminent domain will make lenders wary of doing business there.

"There's a domino effect in play here," he said.

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Michelle Courtney

This issue is really complicated. They even locked doors when the people went to the bank to have a talk. I guess there really is a problem with these people. Its better if they talk it out with these people.

August 27 2013 at 11:43 PM Report abuse rate up rate down Reply

Only in brain-dead California.

August 27 2013 at 1:35 AM Report abuse rate up rate down Reply

If we are going to be a Communist country, we may as well make Obama president for life.

August 27 2013 at 1:29 AM Report abuse +1 rate up rate down Reply
1 reply to betty_brock's comment

Liberals would LOVE that.

August 27 2013 at 1:34 AM Report abuse rate up rate down Reply

People bought houses they knew they couldn't afford. Don't reward them.

August 27 2013 at 1:26 AM Report abuse +1 rate up rate down Reply

Democrats up to no good again, obama must be behind this.

August 26 2013 at 9:35 PM Report abuse -1 rate up rate down Reply
1 reply to ttopmiller's comment

Sarcasm or silliness from an Obamaniac?

August 27 2013 at 1:28 AM Report abuse rate up rate down Reply

and the rest of us suckers who pay our payments on time will experience more fees on future loans. No. Chances are if you are upside down on your home you over extended when you purchased so you could make money. You gambled and you lost. Sorry but same concept as gpong to vegas or the track. If you cant handle the loss dont make the bet.

August 26 2013 at 9:03 PM Report abuse rate up rate down Reply
1 reply to lking4funsoca's comment

The stupid investor gambled and lost???

August 27 2013 at 12:50 AM Report abuse rate up rate down Reply

Property rights that went out the door with Obama and General Motors when they changed all aspects of going broke in America and no one said a word. This wealth envy and crazy government swings on a local and national level will increase. The Banks took advantage of no one except the poor souls who wanted because it was easy.

August 26 2013 at 8:58 PM Report abuse -1 rate up rate down Reply

This is looking more like a Communist country every day.

August 26 2013 at 8:20 PM Report abuse -3 rate up rate down Reply
1 reply to betty_brock's comment

No Betty, it looks like somebody trying to help the average person for a change!

August 27 2013 at 12:01 AM Report abuse -2 rate up rate down Reply
1 reply to BOBETTE / DARRYL's comment

MALARKEY, BOB. Communism through and through.

August 27 2013 at 1:25 AM Report abuse +2 rate up rate down

Then what happens in 10 years when the house is worth 350,000? Who gets the profit from the sale? And if a city starts doing this, then banks will stop lending until al the court cases are completed. And if these loans are backed by Fannie or Freddie, then the taxpayers are on the hook for them if they are backing the paper. Then the taxpayers will pay for this.

August 26 2013 at 7:00 PM Report abuse -1 rate up rate down Reply
1 reply to tnjr's comment

The banks will stop lending to people they know can't pay ( prices won't bubble up) and stupid investors might get smarter??? And not buy CMOs.

August 27 2013 at 12:52 AM Report abuse rate up rate down Reply

The banks took advantage of people and made a lot of money. So now the chickens are coming home to roost.

August 26 2013 at 6:45 PM Report abuse -2 rate up rate down Reply