A San Francisco-based group of financiers called Mortgage Resolution Partners has been calling on Sacramento and other California cities for more than a year, pitching a plan to use government powers of eminent domain to seize underwater mortgages and refinance them for the benefit of homeowners who owe more than their homes are worth.
Most communities took a pass, saying the novel plan was too risky.
Not Richmond, a largely working-class city in the Bay Area. There, a determined and articulate Green Party mayor has helped steer the plan through the City Council in recent months. Today, the city is on the cusp of becoming the first in the nation to use its power to seize private property as a means of addressing lingering fallout from the foreclosure crisis.
Mayor Gayle McLaughlin contends the city has to step in because the banks that contributed to the crisis haven’t acted to help communities such as Richmond, where thousands of homeowners still face the prospect of losing their homes. Neighborhood blight, shrinking tax revenues and a downward-spiraling economy are among the repercussions of mass foreclosures, she said.
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“We’re still feeling the impact, and we want to stop it,” said McLaughlin, 61, a former schoolteacher. “It’s not going to happen if we don’t do it.”
Other communities that seriously considered MRP’s plan, including San Bernardino County, did not find strong public support for the concept. But Richmond, she said, has community support and is willing to take risks that others were not. One goal is to send a message to Wall Street, the mayor said.
“These bankers have caused so much harm; a lot of them should be sitting in jail,” McLaughlin said. “It’s this cold, calculating, callous approach to people’s lives. I’m an elected official who feels a responsibility for our community. I fully believe justice is on our side.”
The bankers who would be affected if Richmond tries to use eminent domain to seize mortgages see it differently. In a federal lawsuit, Wells Fargo and Deutsche Bank, acting on behalf of investors who hold homeowner loans in the form of mortgage-backed securities, argued the plan is an illegal scheme to reap windfall profits for Mortgage Resolution Partners while Richmond takes a small cut as its “fee for renting out its eminent domain powers.”
U.S. District Judge Charles Breyer in San Francisco tossed the lawsuit last month, saying it was premature because Richmond had not used, and might never use, its power of eminent domain to seize mortgages. The judge’s ruling doesn’t preclude the banks from refiling their lawsuit if the city does invoke that power.
What the city has done so far is to sign an agreement with Mortgage Resolution Partners and send out letters to lenders offering to buy 624 underwater loans for what it says is fair market value – generally far less than what the borrowers owe. The city would let homeowners refinance for 15 percent to 20 percent more than what the city paid, with MRP and its investors profiting from the difference.
So far, none of the loan holders has expressed interest in negotiating with the city. The next step could be to invoke eminent domain – government authority typically used for major public projects such as highways – to seize the loans.
‘The banks won’t help’
Mortgage Resolution Partners is proposing that local governments seize the mortgages of homeowners who are underwater but current on their payments. To turn a profit, the plan relies on governments paying less for these mortgages than the current market value of the homes that secure them. MRP claims this discounted price would in fact be fair market value – once the costs to the lender of going through the foreclosure process are considered.
For investors who own mortgage-backed securities, that would mean losing the best loans from the bundle of mortgages that generate their investment income.
The mayor and other civic leaders say Richmond’s housing plight justifies a drastic approach. Despite rapidly rising home prices in the Bay Area, the majority of Richmond homeowners still owe more than their homes are worth, and many have mortgages that are at least twice the value of their houses.
The hundreds of loans identified by MRP as likely candidates for its plan span the breadth of Richmond’s dozen or so neighborhoods, where residents live in varying economic circumstances.
In the moderate-income North & East neighborhood, where modest homes line long straight avenues, Patty Castillo’s mortgage is on the city’s list of loans that could be seized.
A stay-at-home mother of two, Castillo said she and her husband, a diesel mechanic for a nearby school district, paid $420,000 for their white Cape Cod cottage at the height of the housing bubble in 2005. The Contra Costa County Assessor’s Office recently valued the three-bedroom, one-bathroom home at $125,000, she said.
The couple are making interest-only payments of about $1,600 a month with a variable interest rate of around 2.2 percent but can’t afford many more increases in their payment amount, she said. The eminent domain plan, with its potential for a large principal reduction “sounds good to us,” Castillo said.
If the family’s situation doesn’t change dramatically, she said, “We won’t be here in two years. We’ll just leave.”
In the lower-income Iron Triangle area, homeowner after homeowner has walked away or been foreclosed upon, said Edward Stephens, a 62-year-old postal worker who lives in a yellow Victorian bungalow he bought in 1977.
When Stephens moved to Richmond, most of his neighbors were working-class homeowners. Now, he said, many homes are owned by absentee landlords while others sit vacant, with boarded up windows and copper wiring torn out by thieves. Stephens, too, said he strongly supports the eminent domain plan. “The banks won’t help us. We have to help ourselves.”
Support can also be found in Point Richmond, one of the city’s wealthiest areas, where multimillion-dollar homes perch above the Bay with striking views of San Francisco and the Golden Gate Bridge. A quaint town center, with upscale shops and eateries, sits not far from Interstate 580.
Walking his dog along one of Point Richmond’s leafy lanes, Buzz Baylis, 69, a hardware salesman, said he supported the mayor’s drive to purchase or seize mortgages. He likened it to the enforcement actions taken against Wall Street firms by Eliot Spitzer, when Spitzer was attorney general of New York.
“I look at it as the city trying to do what the federal government should have done some time ago,” Baylis said. “Somebody needs to send a message back to D.C.”
A divided council
Whether the city will invoke its eminent domain power is an open question. It took a simple majority of council votes to agree to move forward with the initial stage of the MRP plan. After a long and contentious meeting in September, City Council members voted 4-3 to send out the letters offering to buy the 624 home loans at steeply discounted prices.
A decision to seize even a single home using eminent domain would take a supermajority, with five votes on the seven-member council.
Two of the council members have indicated they firmly oppose the whole idea, saying it is misguided and puts the city at risk of being sued by lenders. Vice Mayor Courtland “Corky” Boozé and Councilman Nathaniel Bates launched an unsuccessful motion at September’s meeting to scuttle the plan.
Three other members – Jovanka Beckles, Jael Myrick and Tom Butt – appeared to be squarely in the mayor’s camp.
That leaves one council member, Jim Rogers, potentially determining whether eminent domain is ever used. At September’s council meeting, he said he supported the idea of helping bail out struggling homeowners but not if it put the city at risk of insolvency. He voted against continuing with Mortgage Resolution Partners unless the group agreed to insure the city against any major legal judgments won by the mortgage industry.
MRP Chairman Steven Gluckstern, the main pitchman for the eminent domain proposal, said in an interview that “MRP is prepared to indemnify the city for the risks associated with this plan,” but left it at that.
The likely next step for the city is to form a joint powers authority, so that other interested communities could also take part, Gluckstern said.
Mayor McLaughlin said she has been talking with officials in San Francisco, the city of El Monte in Los Angeles County and several smaller cities in Southern California about forming a JPA. Oakland officials have discussed it, she said, and “there has been some outreach” to Sacramento-area officials, who earlier decided to take a wait-and-see approach.
If enough cities in California and across the nation take to the concept, it may eventually force lenders and investors to reduce the amount that borrowers owe, McLaughlin said.
“We’re pulling cities together because we do believe it will require a national movement,” the mayor said. “That’s what puts pressure on banks. We don’t want to use eminent domain. We want them to negotiate.”