California’s Novel Eminent Domain Scheme
Posted on December 10 2014 by Gabriela Ocampo
According to Webster’s Dictionary, the word “scheme” can refer to either “a plan, design, or program of action,” or “an underhand plot.” California’s novel eminent domain scheme falls into one of the definitions, but which one? Read on for a synopsis of this complicated issue.
The federal government is accused of failing to bring extensive, meaningful relief to the hardest-hit communities of the housing crisis. Twenty-eight percent of Richmond, CA residents are underwater homeowners, owing significantly more on their mortgages than their homes are worth. The recession devastated Richmond, where homes, on average, lost 66% of their value. Sixteen percent of homeowners have lost their homes in foreclosure, blemishing neighborhoods across the city. The strategy proposed by the city, would assist struggling homeowners, by using the power of eminent domain to condemn the mortgages, and exchange them with affordable FHA loans. Mortgage Resolution Partners (MRP), a private company, has announced a charge of $4,500 to refinance the condemned mortgages. MRP reports that eminent domain is the best strategy to avoid foreclosures and stabilize neighborhoods.
Wall Street banks strongly oppose the use of eminent domain to buy mortgages, and predict a multitude of lawsuits. They further calculate that all mortgage lending would stop in any city using eminent domain. Opponents of the scheme include the Financial Markets Association, the Securities Industry, the National Association of Realtors, the American Banks Association, and other big investors. Richmond’s mayor, Gayle McLaughlin, dismisses the warnings, and publically comments on her total support of the program in improving the welfare of stressed Richmond’ neighborhoods. Some mortgage investors also support the plan explaining that reducing homeowner debt is sensible in many cases, and the only viable option.
In late July, 2013, the city of Richmond sent fair market value offers on 624 underwater mortgages, already in default or at risk of becoming so, to the owners and servicers of the loans. Their offers were refused, and the banks filed for restraining orders to stop the City from employing its power of eminent domain. To exercise the power, the Richmond City Council needs to obtain a supermajority of votes, five of the seven members. As of February, 2014, the City was unable to obtain the required number of votes. The City is continuing its efforts to offer relief to underwater homeowners.
Detractors of the scheme state that Richmond’s eminent domain strategy, to purchase property and refinance it through FHA, would generate up to 20% profits for MRP, and provide a cut for the City. They consider the entire proposal to be a money-making scheme to raise cash. The 624 mortgages pinpointed by the City, have fueled interest as to why.
1. All 624 mortgages originated before 2008 and almost all are current. Mortgages older than six or seven years, rarely go into foreclosure, especially when home values are rising.
2. Many of the mortgages are in prosperous areas, including Point Richmond and Marina Bay, and these areas are not facing neighborhood deterioration, and cannot be considered distressed housing.
3. The program seems designed to meet the financial requirements of MRP and the City, rather than the public good, as the program does not focus on homes in poorer neighborhoods, with higher numbers of foreclosures, and more at-risk borrowers. It focuses on homeowners who have credit histories that allows them to qualify for FHA mortgages, and higher priced properties that generate more money.
The eminent domain scheme, good or bad, is currently at a standstill. Underwater homeowners may find some comfort in the fact that real estate prices continue to rise across the nation.