City government to take over underwater mortgages

[Forever_frost]

http://www.sfgate.com/realestate/article/Richmond-s-pioneering-eminent-domain-threat-4695857.php

Taking a controversial plunge into uncharted waters, Richmond is poised to become the first city in the country to invoke eminent domain to address its foreclosure crisis.

"After years of waiting on the banks to offer up a more comprehensive fix or the federal government, we're stepping into the void to make it happen ourselves," Mayor Gayle McLaughlin said Tuesday.

On Monday the city sent letters to 32 banks and other mortgage holders offering to buy 624 underwater mortgages at discounts to the homes' current value. If the offers are spurned, the letter said Richmond may use the power of eminent domain to condemn the mortgages and seize them, paying court-determined fair market value.

The city would then help the underwater homeowners refinance into mortgages in line with their homes' current worth. City leaders said the goal is to stabilize the community and prevent foreclosures.

Wall Street vehemently opposes the untested idea, claiming it violates property rights and would have a chilling effect on future mortgages in Richmond and could lead to years of costly litigation.

"We think it is unconstitutional, illegal and very bad policy," said Chris Killian, managing director of the Securities and Financial Markets Association, a trade group representing banks, securities firms and others.

Could raise costs
Banks said future mortgages in Richmond would likely be much more expensive to compensate for the extra risk that the city could seize them. McLaughlin characterized that as "redlining" and said the city would fight it.

"Mortgage lending is a business, and lenders and mortgage investors have to say what kind of return they want and how much risk" they can tolerate, Killian said. "That's just the way markets work. If you buy a car and they say the brakes don't work all the time, would you pay full price?"

Wells Fargo, one of the largest mortgage holders in Richmond, said in a statement: "We believe this approach will harm mortgage investors, the housing market, and the communities and borrowers that its proponents claim they would be helping."

Richmond has partnered with San Francisco firm Mortgage Resolution Partners for technical assistance and financial backing.

MRP has said it will handle all legal costs - which could be substantial.

The for-profit firm, which would receive a flat fee of $4,500 per mortgage, will provide funds to acquire the mortgages and then will help the homeowners refinance into loans backed by the Federal Housing Administration.

Many of the underwater mortgages were issued several years ago when interest rates were much higher. Plan proponents said that if Richmond's 4,600 underwater mortgages were reset to the homes' current market value and current interest rates, the homeowners would save an average of $1,180 a month on mortgage payments.

However, even backers said the plan can't be extended to every underwater mortgage in the city. Instead, it concentrates on ones that are not government backed and are held in Wall Street instruments called private securitization trusts.

The recent surge in home values hasn't helped Richmond, where 47 percent of mortgages are still underwater, according to real estate firm Zillow.com.

"In our community we have not seen nor felt any impacts of that" market rebound, said Morris LeGrand, whose Richmond home is worth about $130,000 - far less than he owes on it. "I'm a homeowner by technicality only," he said. "I will never own this home under the current conditions."

Using eminent domain
Eminent domain, which is used to acquire private property for public use, is more commonly associated with government-related development projects, such as buying houses to build a freeway or an airport. It requires paying fair market value for the seized property. Government bodies go before a jury to establish what would be a fair price.

[Forever_frost]

Before that could happen, a Contra Costa County Superior Court judge would determine whether the city had the right to exercise eminent domain, said Bill Falik, an attorney and a partner in MRP.

"Richmond has tremendous legal authority to condemn underwater mortgages," he said. "It doesn't matter if this is a highway project. Foreclosures and underwater properties reduce property taxes and reduce neighboring homes' value. That's called blight, and eminent domain is the authority for cities like Richmond to correct blight."

Richmond and MRP want to buy the mortgages for 80 percent of the homes' current values, leaving a margin for profits and expenses. MRP says the 20 percent discount is what the banks would lose if the home went through foreclosure.

More cities in line
Several other cities, including North Las Vegas and the Southern California towns of El Monte and La Puente, are considering partnering with MRP. San Bernardino County as well as two of its cities, Fontana and Ontario, had previously looked at the idea but then dropped it in the face of fierce opposition from the banking industry.

"Richmond is not afraid to create innovative policies," said City Councilwoman Jovanka Beckles, standing on the steps of Richmond City Hall surrounded by several dozen supporters Tuesday, many from the activist group the Alliance of Californians for Community Empowerment. "In extreme times we create extreme solutions."

When local real estate broker Jeffrey Wright said he opposed the eminent domain plan as "fraught with peril" and bad for the housing market, the ACCE members loudly jeered at him.

Richmond's plan
Richmond hopes to pioneer an unorthodox use of eminent domain power to seize and restructure underwater mortgages. Here's how it would work:

Richmond and Mortgage Resolution Partners - a private firm that is handling the financial side - want to pay 80 percent of the homes' current value, leaving a margin for profits and expenses. MRP says the 20 percent discount is what the banks would lose if a home went through foreclosure.

For instance, if a home with a $300,000 mortgage is now worth $200,000, Richmond would seize the mortgage from the private bondholders who own it for $160,000, or 80 percent of $200,000.

The homeowner would then refinance at $190,000 - or 95 percent of the value. That would leave the homeowner with 5 percent equity. The $190,000 mortgage would pay back the $160,000 used to acquire the loan. The remaining $30,000 would be split among the city, the investors and for costs, including MRP's $4,500 fee.

By the numbers
624 Loans Richmond has made offers on

444 Loans current on payments

180 Loans delinquent on payments

32 Servicers for those loans

$241.98 million Total face value of those 624 mortgages

$177.16 million Total current market value of the 624 homes

$68.82 million Negative equity in the homes

Carolyn Said is a San Francisco Chronicle staff writer. E-mail: csaid@sfchronicle.com Twitter: @csaid