What Happened?
Officials in Richmond, California, recently tried to enact a strategy to use eminent domain to seize underwater mortgages and help struggling homeowners get out of crippling debt resulting from the financial crisis of 2008. Unable to generate enough votes to pass the proposal, the city is looking to partner with nearby communities through joint powers authority to extend the plan to as many homeowners as possible and achieve the necessary majority vote of approval.
The Goal
For eminent domain to be used in Richmond, five of the seven members of the city council must approve the measure. Only four votes, however, are required to create a joint powers authority with a nearby community, which would allow the eminent domain measure to pass indirectly through the partnership.
Officials in support of eminent domain could appoint themselves to the joint powers authority governing board along with other cities’ officials also interested in the strategy. The eminent domain plan is considered highly controversial, and thus is not garnering much support from other California cities.
Eminent Domain
Originally proposed by a group of financiers called Mortgage Resolution Partners, eminent domain is designed to reduce the impact of the foreclosure crisis while simultaneously earning profits for investors in the plan. Cities can use eminent domain to seize mortgages from investors at fair market value. The mortgages purchased would then be refinanced with a reduced principal. The group of investors would be paid out a portion of the difference between the price paid by the city for the mortgages and the new amount homeowners borrow, the Sacramento Bee reported.
Normally, eminent domain is leveraged to seize land rather than mortgages. While blighted property or land needed for municipal infrastructure development is typically subject to eminent domain, there seem to be no clear laws forbidding the application to mortgages.
While no other cities have signed up for the plan, the MRP group has make presentations to several municipalities that expressed interest. As of December, 9.3 million U.S. homes, or one-fifth of all homes with a mortgage, are still underwater in that they are worth at least 25 percent less than what homeowners currently owe lenders.
Sniffing Around The Idea
Irvington, New Jersey, has called for a legal study of the eminent domain plan before making any promises to Richmond or MRP. The New York Times reported the city is looking to circumnavigate around lawsuits and owner objections with incentives or friendly condemnations.
Cities such as Richmond and Irvington are struggling all over the country to prevent more foreclosures, blight and falling property values. While homeowners would appreciate the eminent domain tactic, Wall Street, institutional investors and real estate groups are threatening lawsuits to be filed on municipalities that pursue the plan.
Even the Federal Housing Finance Agency has warned against eminent domain and says it will pull back lending in cities that resort to the strategy. The FHFA claims eminent domain is a threat to the nation’s economic security. If the plan were to be deployed, the agency fears investors in mortgage securities may be upset and create a negative impact on economic activity.
Housing Issues
Gov1 has kept a close eye on different strategies cities are deploying to counter the effects of the housing crisis including development of affordable housing units.