Richmond Moves Forward on Eminent Domain

Despite a lawsuit and threats from thernsecurities industry and the federal government to cut off its credit, the CityrnCouncil in Richmond, California voted this morning to take another step forward in a planrnto seize underwater mortgages using eminent domain.   Richmond has already sent letters to 32rnmortgage servicers offering to buy 624 mortgages at the actual value of therncollateral property, often a fraction of the outstanding principal balance.   Thernintent is to restructure the performing loans to reflect their actualrncollateral value and repackage them for sale on the secondary market. </p

The letters, along with Richmond’srnimplied intent to take the mortgages by eminent domain if servicers did notrnsell them voluntarily, has prompted a suit seeking a preliminary injunctionrnagainst the city filed by Wells Fargo and Deutsche Bank.   </p

Today’s council vote endorses a proposal from Mayor Gayle McLaughlin which willrnestablish a Joint Powers Authority to coordinate with other cities in expandingrnthe plan which is being promoted in many cities in California and elsewhere by MortgagernResolution Partners (MRP).   The investor group hopes to work with therncities in the actual restructure and re-securitization of loans, and accordingrnto some reports, expects to make in excess of $4,000 each. The vote does notrnauthorize the use of eminent domain, this would require a supermajority vote ofrnthe council.</p

When the eminent domain plan was firstrnunveiled by San Bernardino (California) County over a year ago it triggeredrnstrong pushback from the securities industry, especially SIFMA, its tradernorganization.  SIFMA has repeatedlyrnstated that residents of any city pursuing such a plan would find it difficultrnto obtain mortgage credit.  This threatrnhas been reinforced by the Federal Housing Finance Agency which has stated itrnwould not allow Fannie Mae and Freddie Mac for which it is conservator tornguarantee or purchase residential loans in such jurisdictions.  </p

Since San Bernardino came forward with its proposal other California cities,rnNorth Las Vegas, Chicago, and Brockton, Massachusetts announced similarrnplans.  Most have now said they do not intendrnto proceed.</p

City council members opposed to the plan said that using eminent domainrnwould put Richmond at risk of expensive lawsuits that could destroy the city’srnfinances as well as tightened and more expensive access to credit.   NBC News said that Richmond had no takersrnlast month when the successor to its redevelopment agency put $34 million ofrnbonds up for sale to refinance previous debt. The eminent domain plan had beenrndisclosed to the U.S. municipal bond market. </p

Reuters quoted McLaughlin as saying Richmond’s residents have been “badlyrnharmed by this housing crisis.” She defended the plan and the partnershiprnwith MRP during a heavily attended and often contentious city council meetingrnthat actually began on Tuesday evening saying, “Too many have already lostrntheir homes.”</p

The first hearing on the Well Fargo/Deutsche Bank suit will be heldrnon Thursday in U.S. District Court.

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