After months of trying, members of the Richmond City Council have been unable to muster the supermajority of votes they need to enact a controversial plan to use eminent domain to seize underwater mortgages and slash the amounts that borrowers owe.
Now Richmond Mayor Gayle McLaughlin and other council members who support the plan are trying another strategy in their ongoing effort to aid struggling homeowners in a largely working-class city hit hard by the housing collapse. They are looking to partner with other communities in a joint powers authority, or JPA. The move would require only a simple majority of council votes and could broaden Richmond’s initiative to other cities in California or even in other states.
The mayor, a member of the Green Party, said she is still hoping to send a message to Wall Street for its role in the housing bubble and ensuing foreclosure crisis but that Richmond can’t go it alone.
“The other cities have to take a step forward with us,” McLaughlin said. “It takes a certain gumption to do it, but it’s so important. We have to push back at these banks.”
Critics call the new strategy an end-run around the democratic process. Five votes are needed for the city to use eminent domain on its own, and a fifth vote in Richmond has failed to materialize.
It would take only four votes of the seven-member council to join a JPA, and the four council members who have indicated they support using eminent domain could appoint themselves to the authority’s governing board, which would be stacked with like-minded leaders from other cities.
“You’d have a governing body with a majority of people who want to move forward (with using eminent domain),” said Jeffrey Wright, a Richmond real estate broker and leading opponent of the plan.
So far the mayor and her supporters have been unable to find another city willing to participate, Wright said.
“They haven’t been able to find a JPA partner,” he said. “That’s the reality of the situation. They scoured all over the state of California with no success.”
McLaughlin said she remains hopeful another city might still sign on. She said she has talked with interested leaders in San Francisco, neighboring communities in Contra Costa County, and the city of El Monte in Southern California.
While they may be interested in the idea, none of those cities besides Richmond has advanced the novel and controversial plan, put forward in 2012 by a group of San Francisco financiers called Mortgage Resolution Partners.
The group has pitched its plan to dozens of cities, including Sacramento, as a way to limit the fallout from the foreclosure crisis while earning MRP’s investors sizable profits.
In short, the plan encourages cities to use eminent domain to seize mortgages from investors, paying what MRP claims is fair market value. The mortgages then would be refinanced with principal reduced. MRP and its investors would take a cut of the difference between the price the city paid for the loans and the new amount homeowners borrow.
Many cities took a pass, saying the plan was too risky, especially after they were threatened with lawsuits by the mortgage industry.
Richmond moved ahead. The city signed an advisory agreement with MRP and sent out letters to note holders offering to buy hundreds of loans for less than what was owed.
While no city has gone as far as Richmond in the process, many continue to weigh the proposal.
“We’re still doing a lot more homework,” said Andre Quintero, the mayor of El Monte. “I certainly hope our council will have an open mind and move forward, but for now we’re doing due diligence and (looking at potential) legal liabilities.”
McLaughlin said cities outside California including Baltimore, Seattle and Newark, N.J., also are weighing MRP’s plan. “According to California law, we could form a JPA with cities in other states but they would have to follow their own laws,” which might not allow the formation of an interstate JPA, she said.
The mayor said she plans to focus on nearby cities such as San Pablo and Vallejo that have been struggling with large numbers of foreclosures. “I’m definitely trying to look next door,” she said. “We’d like to have a lot of partners, but all we need is one.”
Steven Gluckstern, chairman of Mortgage Resolution Partners, said he still thinks his group’s plan is viable and that Richmond eventually will succeed in pushing it forward, probably with partners in a JPA. “There’s more and more conversations with cities going on,” he said.
The housing recovery has bolstered many areas of California, including Silicon Valley, San Francisco and Sacramento. But many other cities have been left behind, and millions of Americans still owe far more than their homes are worth after last decade’s housing bubble, Gluckstern said.
On Thursday, RealtyTrac, an Irvine-based clearinghouse for foreclosure information, reported that 9.3 million U.S. residential properties – about one-fifth of homes with a mortgage – remained deeply underwater in December, meaning they were worth at least 25 percent less than homeowners owed.
Richmond’s median home price sank from a high of $454,000 in 2006 to $95,000 in 2009 – a 79 percent drop, real estate information service DataQuick reported. As of September, the city’s median home price remained more than 49 percent below its 2006 peak, the firm said. Other Bay Area cities, such as Palo Alto and San Francisco, exceeded their bubble-era peaks last year.
“The problem is the problem’s not going away,” Gluckstern said. “If it’s not going away, you’re confronted with the issue of what you can do to help local citizens.”
Call The Bee’s Hudson Sangree, (916) 321-1191.