Eminent Domain No Longer Theoretical; Critics Warn of Repercussions

Months after other cities quietlyrndropped similar plans the city of Richmond, California yesterdayrnquietly moved to buy 624 residential mortgages in its low incomernneighborhoods, possibly invoking eminent domain to do so. The cityrnsent letters to 32 servicers and loan pool trustees notifying them ofrnthe plan under which the city would pay as little as 25 cent on therndollar for the loans. </p

The mortgages, all of which arernunderwater, that is have an unpaid principal balance exceeding thernvalue of the homes which secure them, would be restructured by therncity at the actual home value and then resold on the secondaryrnmarket. Only about one-third of the loans Richmond is planning tornbuy are delinquent on their loan payments but numerous studies havernshown that owners of homes that are “underwater” on theirrnmortgages are far more likely to default on those mortgages than arernowners who have equity in their homes. Such homeowners may also bernunable to sell their homes or refinance the mortgages to takernadvantage of lower interest rates. There are also reportedlyrninterest only, negative amortization and other exotic loans typesrnamong the subject loans. </p

Richmond Mayor Gayle McLaughlin said inrna statement that residents of her city “have been suffering forrnyears thanks to the housing crisis Wall Street created and which WallrnStreet refuses to fix.” City officials said that the initial 624rnmortgage purchase would be followed by others and estimated more thanrnhalf of the homes in the city are underwater. </p

Richmond hopes the investors andrnservicers will sell the loans voluntarily, but representatives say itrnwill use its power of eminent domain, under which a government entityrncan take property (properly compensating the owner) for “the commonrngood,” if necessary. </p

This type of plan was first proposed byrnSan Bernardino County, California and two of its incorporated citiesrnin June 2012. Stockton was followed by several other Californiarncities, Chicago, and Brockton, Massachusetts. Numerous organizationsrnsuch as the Securities Industry and Financial Markets Associationrn(SIFMA), the Mortgage Bankers Association (MBA) actively opposed thernproposal and  Edward J. DeMarco, Acting Director of the FederalrnHousing Finance Agency (FHFA) conservator of Fannie Mae and FreddiernMac opened a period of public comment on the idea based on potentialrnharm it might cause to the conservatorships. San Bernardino formallyrnwithdrew its plan last January and other cities have gone quiet onrnthe issue.</p

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)</p

Richmond, located on the east side ofrnSan Francisco Bay, has slightly over 100,000 residents. It has arnpoverty rate above the state average has struggled for years withrnhigher rates of unemployment and crime and other negative comparisonsrnwith the many very affluent cities and towns in the Bay area. </p

Last week Representative John Campbellrn(R-CA) reintroduced his bill from last year titled DefendingrnAmerican Taxpayers from Abusive Government Taking Act intornthe House. The bill would amend the legislation originallyrnestablishing Fannie Mae, Freddie Mac, and the FHA to prohibit themrnfrom purchasing any mortgage secured by a property within a countyrnthat had exercised eminent domain for a loan taking within thernpreceding 120 months and FHA</p

Central to all of the eminent domainrnproposals is Mortgage Resolution Partners, LLC (MRP). A San Franciscorninvestment firm established in the summer of 2012 by Phil Angelides,rnformer chair of the Financial Crisis Inquiry Commission, for the solernpurpose of facilitating such mortgage purchases. MRP would work withrnthe municipalities to obtain financing to buy the distressedrnmortgages and restructure them. MRP would receive a fee for everyrntroubled loan it restructured under the plan. It was reported byrnReuters that Angelides had told potential investors in his companyrnthat they might realize a 20 percent annual return. Bloomberg nowrnreports that Steven Gluckstern is the MRP’s owner. </p

The Association of Mortgage Investors (AMI) released a statementrnyesterday condemning the use of eminent domain as a foreclosurernmitigation tool, calling the plan “an eminent domain tax.” “Thernscheme is designed around benefiting a private investment firm, whichrnis registered with the S.E.C. Mortgage Resolution Partners is notrnRobin Hood.  MRP is a for-profit business that runs anrninvestment fund.  However, this fund does not make investmentsrnin the free market.  Its business model depends on persuadingrnlocal governments to use the blunt instrument of eminent domain torntake money away from the investments of seniors, unions, and othersrnin the mortgage market, give that money to MRP, and, as a result,rnlower property values across communities as rates on new mortgages gornup.”</p

AMI said its analysis shows the overall impact of eminent domain’srnuse in Richmond will be vastly negative because it will limit creditrnavailability by increasing risk and thereby raising the cost ofrnmortgage borrowing.  “The data shows it only helps 198rnRichmond homeowners or 0.5% of all households, while harming everyonernelse,” the statement said.

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