Months after other cities quietly dropped similar plans the city of Richmond, California yesterday quietly moved to buy 624 residential mortgages in its low income neighborhoods, possibly invoking eminent domain to do so. The city sent letters to 32 servicers and loan pool trustees notifying them of the plan under which the city would pay as little as 25 cent on the dollar for the loans.

The mortgages, all of which are underwater, that is have an unpaid principal balance exceeding the value of the homes which secure them, would be restructured by the city at the actual home value and then resold on the secondary market. Only about one-third of the loans Richmond is planning to buy are delinquent on their loan payments but numerous studies have shown that owners of homes that are "underwater" on their mortgages are far more likely to default on those mortgages than are owners who have equity in their homes. Such homeowners may also be unable to sell their homes or refinance the mortgages to take advantage of lower interest rates. There are also reportedly interest only, negative amortization and other exotic loans types among the subject loans.

Richmond Mayor Gayle McLaughlin said in a statement that residents of her city "have been suffering for years thanks to the housing crisis Wall Street created and which Wall Street refuses to fix." City officials said that the initial 624 mortgage purchase would be followed by others and estimated more than half of the homes in the city are underwater.

Richmond hopes the investors and servicers will sell the loans voluntarily, but representatives say it will use its power of eminent domain, under which a government entity can take property (properly compensating the owner) for "the common good," if necessary.

This type of plan was first proposed by San Bernardino County, California and two of its incorporated cities in June 2012. Stockton was followed by several other California cities, Chicago, and Brockton, Massachusetts. Numerous organizations such as the Securities Industry and Financial Markets Association (SIFMA), the Mortgage Bankers Association (MBA) actively opposed the proposal and  Edward J. DeMarco, Acting Director of the Federal Housing Finance Agency (FHFA) conservator of Fannie Mae and Freddie Mac opened a period of public comment on the idea based on potential harm it might cause to the conservatorships. San Bernardino formally withdrew its plan last January and other cities have gone quiet on the issue.

David Stevens, President and CEO of the Mortgage Bankers Association issued the following statement: “The program is a short-term solution for a few underwater borrowers that will have severe negative long-term costs for every homeowner in the city.  Mortgages in Richmond will become more expensive, making neighboring cities more desirable for prospective home buyers, which will hold down home values for everyone in Richmond.  In short, the program is ill-advised and likely unconstitutional and will add to Richmond’s problems rather than solve them.”  (More info is available from the MBA on it's Eminent Domain Resource Center)

Richmond, located on the east side of San Francisco Bay, has slightly over 100,000 residents. It has a poverty rate above the state average has struggled for years with higher rates of unemployment and crime and other negative comparisons with the many very affluent cities and towns in the Bay area.

Last week Representative John Campbell (R-CA) reintroduced his bill from last year titled Defending American Taxpayers from Abusive Government Taking Act into the House. The bill would amend the legislation originally establishing Fannie Mae, Freddie Mac, and the FHA to prohibit them from purchasing any mortgage secured by a property within a county that had exercised eminent domain for a loan taking within the preceding 120 months and FHA

Central to all of the eminent domain proposals is Mortgage Resolution Partners, LLC (MRP),  a San Francisco investment firm created solely to facilitate the use of eminent domain in the mortgage market.  MRP would work with the municipalities to obtain financing to buy the distressed mortgages and restructure them. MRP would receive a fee for every troubled loan it restructured under the plan. Reuters reported that MRP told potential investors it could generate a 20 percent annual return by using "legal and political leverage" to acquire mortgages.  

The Association of Mortgage Investors (AMI) released a statement yesterday condemning the use of eminent domain as a foreclosure mitigation tool, calling the plan "an eminent domain tax." "The scheme is designed around benefiting a private investment firm, which is registered with the S.E.C. Mortgage Resolution Partners is not Robin Hood.  MRP is a for-profit business that runs an investment fund.  However, this fund does not make investments in the free market.  Its business model depends on persuading local governments to use the blunt instrument of eminent domain to take money away from the investments of seniors, unions, and others in the mortgage market, give that money to MRP, and, as a result, lower property values across communities as rates on new mortgages go up."

AMI said its analysis shows the overall impact of eminent domain's use in Richmond will be vastly negative because it will limit credit availability by increasing risk and thereby raising the cost of mortgage borrowing.  "The data shows it only helps 198 Richmond homeowners or 0.5% of all households, while harming everyone else," the statement said.