By Jim Christie
RICHMOND, Calif, Sept 11 Richmond, California's
leaders approved on Wednesday morning a plan for the city to
become the first in the nation to acquire mortgages with
negative equity in a bid to keep local residents in their homes.
The power of 'eminent domain' allows governments to seize
private property for a public purpose. Critics say the plan
threatens the market for private-label mortgage-backed
Richmond's city council voted 4 to 3 for Mayor Gayle
McLaughlin's proposal for city staff to work more closely with
Mortgage Resolution Partners to put the plan crafted by the
investor group for the city to work.
Richmond can now invoke eminent domain if trusts for more
than 620 delinquent and performing "underwater" mortgages reject
offers made by the city to buy the loans at deep discount pegged
to their properties' current appraised prices to refinance them
and reduce their principal.
A mortgage is under water when its unpaid balance is greater
than its property's market value.
MRP has failed to get similar plans approved by local
governments elsewhere - most recently in North Las Vegas, Nevada
and earlier this year in San Bernardino County in Southern
California - as the mortgage industry and local real estate
businesses rallied against them.
But in Richmond, MRP found an ally in a Wall Street-bashing
Green Party mayor of one of the San Francisco region's poorest
cities who sees working with the investor group to acquire
mortgages as a public purpose if it makes the loans more
affordable, averts foreclosures and alleviates blight.
Richmond's residents have been "badly harmed by this housing
crisis," McLaughlin said, defending the plan and partnership
with MRP during an often contentious city council meeting that
began Tuesday evening and ended early Wednesday morning. "Too
many have already lost their homes."
City council members opposed to the plan countered that
using eminent domain would put Richmond at risk of expensive
lawsuits that could destroy the city's finances.
"A 1 percent chance of bankruptcy from this program is a
deal-breaker for me," Councilman Jim Rogers told a crowd of
about 300 people at the meeting, moved to a city auditorium from
the council's chamber.
Other council members warned of a backlash from financial
institutions, noting Richmond had no takers last month when the
successor to its redevelopment agency put $34 million of bonds
up for sale to refinance previous debt. The eminent domain plan
had been disclosed to the U.S. municipal bond market.
While housing advocates urged support for the plan, realtor
Jeffrey Wright warned that going through with eminent domain
could prompt a clampdown in mortgage lending in Richmond or push
up mortgage interest rates in the city of about 104,000
Responding to the plan, the Federal Housing Finance Agency
recently said it would press Fannie Mae and Freddie Mac to limit
or cease its business where such proposals get approved,
effectively closing off most mortgage financing there.
Investors holding the mortgages targeted by Richmond dispute
altruism motivates the plan and charge the city would lend its
eminent domain power to San Francisco-based MRP to split profits
The investors have sued through trustees Wells Fargo & Co
and Deutsche Bank AG in U.S. District Court to block the plan,
which they say relies on them swallowing losses. The two sides
square off in court in person for the first time on Thursday.
McLaughlin's proposal directs city staff to work with other
local governments interested in the plan, calls for city staff
and MRP to resolve its legal issues and confirms the city
council would hold votes to seize mortgages by eminent domain if
necessary. That would require a supermajority vote of the