Richmond, CA may become the first city in the U.S. to take over underwater mortgages after city council members approved an unorthodox plan to protect residents from foreclosure early Wednesday morning. The proposal would allow the city to seize properties through the power of eminent domain if lenders reject Richmond’s offers to buy the loans discounted to their current market value. Eminent domain lets a government seize private property as long as it is furthering a public good. In Richmond’s case, that public good would be to lift the city out of an economic slump and keep residents off the streets.
Half of all Richmond homeowners are currently underwater and could default at any moment, creating a desperate situation for the predominantly working-class city. Sixteen percent of city residents’ mortgages have already gone into foreclosure. But the investor group Mortgage Resolution Partners offered Richmond and other cities in the same boat a solution: it will line up the necessary private funds to help Richmond buy up the loans and refinance them.
In July, with the help of Mortgage Resolution Partners, Richmond offered to buy more than 620 flailing mortgages at fair market value. Rather than accept this offer, Wells Fargo and Deutsche Bank sued to stop the plan on behalf of all the securities trusts that hold the bonds.
Wall Street has threatened to halt mortgage lending in any jurisdiction that tries this eminent domain strategy, and the Federal Housing Finance Agency has also warned it would limit loans. This has been enough to deter every other city that has toyed with the eminent domain idea. But MRP has pitched its solution as a one-time emergency strategy to shake off the housing crisis once and for all.
Other cities struggling with underwater mortgages will be watching Richmond closely as it begins eminent domain proceedings and fends off litigation. As of June 30, 7.1 million mortgage borrowers are still underwater, with many of these homeowners concentrated in Nevada, Florida, Arizona, Michigan, and Georgia.