California City Backs Plan to Seize 'Underwater' Mortgages

richmond city council approves plan to seize underwater mortgages
Justin Sullivan/Getty Images
By Jim Christie

RICHMOND, Calif. -- Richmond, Calif.'s leaders approved Wednesday morning a plan for the city to become the first in the nation to acquire mortgages with negative equity in a bid to keep local residents in their homes.

The power of 'eminent domain' allows governments to seize private property for a public purpose. Critics say the plan threatens the market for private-label mortgage-backed securities.

Richmond's city council voted 4 to 3 for Mayor Gayle McLaughlin's proposal for city staff to work more closely with Mortgage Resolution Partners to put the plan crafted by the investor group for the city to work.

Richmond can now invoke eminent domain if trusts for more than 620 delinquent and performing "underwater" mortgages reject offers made by the city to buy the loans at deep discount pegged to their properties' current appraised prices to refinance them and reduce their principal.

A mortgage is under water when its unpaid balance is greater than its property's market value.

Mortgage Resolution Partners has failed to get similar plans approved by local governments elsewhere -- most recently in North Las Vegas, Nev., and earlier this year in San Bernardino County in Southern California -- as the mortgage industry and local real estate businesses rallied against them.

But in Richmond, Mortgage Resolution Partners found an ally in a Wall Street-bashing Green Party mayor of one of the San Francisco region's poorest cities who sees working with the investor group to acquire mortgages as a public purpose if it makes the loans more affordable, averts foreclosures and alleviates blight.

Richmond's residents have been "badly harmed by this housing crisis," McLaughlin said, defending the plan and partnership with Mortgage Resolution Partners during an often contentious city council meeting that began Tuesday evening and ended early Wednesday morning. "Too many have already lost their homes."

City council members opposed to the plan countered that using eminent domain would put Richmond at risk of expensive lawsuits that could destroy the city's finances.

"A 1 percent chance of bankruptcy from this program is a deal-breaker for me," Councilman Jim Rogers told a crowd of about 300 people at the meeting, moved to a city auditorium from the council's chamber.

Other council members warned of a backlash from financial institutions, noting Richmond had no takers last month when the successor to its redevelopment agency put $34 million of bonds up for sale to refinance previous debt. The eminent domain plan had been disclosed to the U.S. municipal bond market.

While housing advocates urged support for the plan, realtor Jeffrey Wright warned that going through with eminent domain could prompt a clampdown in mortgage lending in Richmond or push up mortgage interest rates in the city of about 104,000 residents.

Responding to the plan, the Federal Housing Finance Agency recently said it would press Fannie Mae and Freddie Mac to limit or cease its business where such proposals get approved, effectively closing off most mortgage financing there.

Investors holding the mortgages targeted by Richmond dispute altruism motivates the plan and charge the city would lend its eminent domain power to San Francisco-based Mortgage Resolution Partners to split profits from refinancings.

The investors have sued through trustees Wells Fargo & Co. (WFC) and Deutsche Bank (DB) in U.S. District Court to block the plan, which they say relies on them swallowing losses. The two sides square off in court in person for the first time Thursday.

McLaughlin's proposal directs city staff to work with other local governments interested in the plan, calls for city staff and Mortgage Resolution Partners to resolve its legal issues and confirms the city council would hold votes to seize mortgages by eminent domain if necessary. That would require a supermajority vote of the council.

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That is what we liberals like. No responsibility.

September 11 2013 at 2:54 PM Report abuse +3 rate up rate down Reply
Ted Elms

Financial melt downs are painful, but there are no easy solutions. The City needs to find an alternative solution. This isolationist stand will doom the City for years to come, and will turn the tap off for future investment from both private industry and the Government.

If you think property values and property tax collection are down now, wait until the City of Richmond owns all those none performing loans.

The City is struggling right now to overcome problems that it inherited from previous administrations. The people of Richmond are prepared to take a stand, but they need leadership, not give away, throw away mantras.

Attracting investment and agencies like Berkeley Labs to relocate there is the future.

Economic cycles bring highs and lows. Richmond has lots of advantages to offer new investment. It needs to partner with State and Federal Government to bring prosperity.

There is always a consequence to not paying your bills. The road that led to not being able to pay your bills is complicated, but this process has been in play for a long time, and the City of Richmond has not found a magical way to solve that problem.

Eminent Domain is a powerful tool, but use it wisely and sparingly.

Investment is needed, not more Government bullying.

If eminent domain was used to buy up a whole neighborhood in order to develop a high tech science business park.........then now we're talking.

Richmond planning department is doing a great job, but it needs help in promoting Richmond...................crazy ideas from crazy politicians sends the wrong message, and will doom all the hard work that has been done.

September 11 2013 at 12:39 PM Report abuse +1 rate up rate down Reply