Richmond, Calif.'s controversial plan to use eminent domain to seize underwater mortgages in an effort to help homeowners avoid foreclosure took a giant leap forward on Wednesday when the city council voted 4-3 in favor of moving forward with the proposal.
The city will now work with Mortgage Resolution Partners (MRP) to create a detailed plan that will be developed in conjunction with public officials, according to a Reuters report.
The concept involves a local government purchasing underwater mortgages secured by properties within its borders, restructuring them to reflect actual property values and then reselling them on the secondary market. In the event servicers and investors are unwilling to participate, then the municipality would seize the loans (with compensation to the owners) using eminent domain.
In Richmond, officials plan to invoke eminent domain should investors or trusts decline to purchase refinanced mortgages for more than 620 delinquent and performing ‘underwater’ properties.
MRP has brought similar plans before other local governments – most recently in North Las Vegas, Nev., and earlier this year in San Bernardino County in Southern California – however most of those municipalities, including North Las Vegas, have since decided not to move forward with the proposals.
In August, the Federal Housing Finance Agency (FHFA) issued a statement vowing to fight local, county and state eminent domain proceedings in court and threatening to cut off involved municipalities from access to Fannie and Freddie loans should they choose to pursue the eminent domain option.
As the conservator of Freddie Mac and Fannie Mae, as well as the Federal Home Loan Banks, the FHFA is concerned that widespread seizures of the loans and their subsequent refinancing would diminish asset values.
In a recent memorandum, the FHFA says it ‘continues to have serious concerns on the use of eminent domain to restructure existing financial contracts and has determined such use presents a clear threat to the safe-and-sound operations of Fannie Mae, Freddie Mac and the Federal Home Loan Banks.’
In addition to the FHFA, the Department of Housing and Urban Development, and other federal agencies, Richmond could also face a backlash from financial institutions as a result of adopting the proposal. According to the Reuters report, the city had no takers last month when the successor to its redevelopment agency put $34 million of bonds up for sale to refinance previous debt.
Investors holding the mortgages targeted by Richmond are reportedly suing the city through trustees Wells Fargo & Co. and Deutsche Bank AG in U.S. District Court. They hope to block the plan, which they say relies on them to absorb the losses.
Meanwhile, Rep. John Campbell, R-Calif., recently reintroduced the Defending American Taxpayers From Abusive Government Takings Act, which was originally introduced in September 2012. The bill would, in effect, preclude cities and towns from using eminent domain as a tool for keeping homeowners out of foreclosure. Chicago, Stockton, Calif., and Brockton, Mass., are other cities that have proposed such laws.
The proposed bill would amend the Federal National Mortgage Association Act and the Federal Home Loan Mortgage Corporation Act to prohibit Fannie Mae and Freddie Mac from purchasing any mortgage secured by eminent domain within the preceding 120 months. In addition, it would amend the National Housing Act to prohibit the Secretary of the Department of Housing and Urban Development from insuring or guaranteeing any loans in counties where such eminent domain laws are in effect.
For more, check out the Reuters report.