Reverse eminent domain gains ground in Richmond

Richmond, California, is taking steps to enforce a reverse eminent domain taking of mortgages on underwater homes. And it’s plenty dire, down Richmond way: approximately half of all the city’s homeowners are underwater on their mortgages.

Reverse eminent domain targets and seizes mortgages, not real estate. On acquiring the mortgages, the local government modifies them to keep homeowners in their houses. This is unlike a traditional eminent domain action in which real estate is condemned, seized and repurposed by the government “for the greater good.”

The city has offered to purchase the mortgages at fair market value (FMV), which sounds to be on solid appraisal conditions. Both current and delinquent mortgages are targeted, although the initial plan does not include any large second mortgages. If loan servicers and trustees refuse to sell, the city will seize the mortgages through reverse eminent domain.

Many government and trade organizations have publicly opposed the plan, including the:

• Federal Housing Finance Agency (FHFA);
• Securities Industry and Financial Markets Association;
• American Bankers Association; and
• National Association of Realtors (NAR).

However, Richmond’s mayor has expressed her determination to see the plan through, despite opposition.

first tuesday insight

Kudos to Richmond for being the first in the nation to take a reverse eminent domain proposal this far. Too bad the trade unions are too myopic to see that these homes cannot be sold by the owners until the loans have a loan-to-value ratio (LTV) of 94%. Just whose side are they on?

At a 94% LTV, owners will be able to sell, relocate and buy another home. This is exactly the turnover needed to produce a normal housing market.

Remember this, no matter your political persuasion. The city will buy and the courts will enforce their payment of the open market value of any mortgage they seize. Open market means there is no overpaying, and no shortchanging.

Fair is fair, unless you are a lender. The problem is that Congress has allowed mortgage lenders to keep loans on their books at values set by their management (mark-to-management), rather than the market (mark-to-market).

As we post this piece, there are conflicting reports about the city’s progress. It’s still unclear whether they have officially approved the mortgage seizure or if the city is bluffing in the hopes of persuading lenders to sell at open market prices.
Still, no other municipality has even offered to purchase underwater mortgages until now. The City of Richmond and their investment partner, Mortgage Resolution Partners (a private doppelganger of the Resolution Trust Corporation of the 1990s recession), did not respond to phone calls or emails seeking further information regarding the plan.

Richmond’s expressed determination to implement reverse eminent domain will test the FHFA’s past warnings against similar proposals. The FHFA has been vocal in its disapproval of forcibly modifying underwater mortgages and has released a statement threatening to “restrict or cease business activities within the jurisdiction of any state or local authority employing eminent domain to restructure mortgage loan contracts.”

Related articles:

Reverse eminent domain met with redlining threat

San Bernardino: an underwater homeowner’s white knight?

Lenders, too, have opposed the plan. They’ve cautioned that reverse eminent domain will increase risk and lower the value of mortgages on the mortgage-backed bond market, thereby increasing loan costs for borrowers in the future. Although Richmond has not yet seized any mortgages, a group of mortgage bond trustees has already filed suit against the city to halt the program.

Let’s be clear about this: the response from lenders and the FHFA so far smacks of redlining threats. By targeting buyers according to their geographic region with less advantageous loan terms, lenders discriminate against this group of buyers. This is redlining, and this is unlawful.  Also, remember that lenders are the world’s best bluffers, since all they have is piles of cheap money to lend.

Now that Richmond has taken the leap, we’ll have to wait and see how they land. If they successfully take and modify underwater mortgages through reverse eminent domain, the door is open to other cities to do the same. More news as it develops!

Re: “A City Invokes Seizure Laws to Save Homes” from The New York Times.