California City Votes to Seize Underwater Mortgages

The city council in the San Francisco suburb of Richmond voted narrowly early Wednesday (it was a long meeting) to go where no municipality has dared go before: trying to use eminent domain laws to seize mortgages on homes whose values have dropped far below what’s owed.

And yes, it’s complicated. And a roll of the dice — no one is sure that it will work, or what the repercussions will be. But with a wide array of opposition including local real estate agents, the Federal Housing Finance Agency and Wall Street trade groups, it could mean good things. These days, Wall Street opposition is almost a stamp of approval. Mother Jones has been tracking the story more closely than others:

Richmond would carry out the purchases with the help of Mortgage Resolution Partners, an advisory firm run by a politically connected group of investors. … After Richmond seizes the loans, new lenders arranged by MRP would step in and essentially refinance them. The borrowers would stay in their homes, and the new loans would reflect the current value of the properties. In this scenario, a family in Richmond that bought a $300,000 house that’s now worth $200,000 would see its monthly payments decrease by $300 to $800.

For more than a year now, MRP’s chairman, Steven Gluckstern, has been trying and failing to convince some of the cities worst hit by the foreclosure crisis to adopt his eminent domain plan. Politicians in San Bernadino, Salinas, and about a dozen other towns flirted with the idea to varying degrees before getting cold feet. But Richmond is supposed to be different: “We’re not willing to back down on this,” Richmond’s Mayor Gayle McLaughlin, a former schoolteacher, told the New York Times in July. “They can put forward as much pressure as they would like, but I am very committed to this program and I’ve very committed to the well-being of our neighborhoods.”

For deeper background on how this all would work, go here. Meanwhile, Atlantic Cities offers this succinct overview of the problem Richmond faces:

Five years into the housing crisis, the city of about 105,000 and its Green Party mayor figure they’ve run out of better options – and out of patience with federal solutions that never came – to ease the local foreclosure glut. The median price of homes in town has dropped to less than half of what it was at the height of the housing boom. And the city has estimated that about 51 percent of its homeowners are underwater. Richmond is in worse shape than most towns sacked by the housing bubble: Its home values are low, its unemployment and poverty rates are high, and its residents in danger of foreclosure are unlikely to have the principal on their mortgages reduced any time soon

As the piece points out, “the whole proposal is a little hard to wrap your head around because some of the actors appear to be playing for the wrong team. Mortgage Resolution Partners is not a non-profit community group. It’s a business run by people who’ve worked in the banking and real estate worlds. This housing story is not quite David vs. Goliath. It’s David and some savvy investors formerly associated with Goliath vs. Goliath.”

But “just because everyone else has refused to try this doesn’t mean it’s not a good idea,” The Atlantic Cities’ Emily Badger notes. True. In fact, it could be a bad idea in the end. But at least municipal leaders are, well, leading for a change, instead of letting the banks have their way unopposed, a push-back that can be read only as a good thing.

—Posted by Scott Martelle.