City Moving Forward on Eminent Domain for Troubled Mortgages
August 1, 2013
Despite national controversy surrounding the issue of using eminent domain to stop foreclosures, the city of Richmond, Calif., will become the first to implement the practice.
The city plans to use eminent domain to buy underwater mortgages and reduce home owner debt by refinancing the loans. The intention is to keep struggling home owners in their homes.
About two dozen local and state governments — including Newark, N.J., Seattle, and several other cities in California — have been considering similar uses of eminent domain.
But strong opposition has kept other cities from moving forward with such a plan. Lawmakers, banks, and members of the real estate industry — including the National Association of REALTORS® — have argued against using eminent domain in such a way, calling it unconstitutional and unprecedented.
“The banks have warned that such a move will bring down a hail of lawsuits and all but halt mortgage lending in any city with the temerity to try it,” The New York Times reports.
However, city officials in Richmond, Calif., say they are tired of waiting for foreclosure aid from the federal government.
“We’re not willing to back down on this,” says Richmond Mayor Gayle McLaughlin. “They can put forward as much pressure as they would like, but I’m very committed to this program, and I’m very committed to the well-being of our neighborhoods.”
About half of all Richmond home owners with mortgages are underwater.
Richmond city officials plan to buy both current and delinquent loans at fair market value. As The New York Times explains: “In a hypothetical example, a home mortgaged for $400,000 is now worth $200,000. The city plans to buy the loan for $160,000, or about 80 percent of the value of the home, a discount that factors in the risk of default. Then, the city would write down the debt to $190,000 and allow the home owner to refinance at the new amount, probably through a government program.” The $30,000 difference would be distributed among the city and investors who put up money for the loan, as well as go toward closing costs. “The home owner would go from owing twice what the home is worth to having $10,000 in equity,” The New York Times explains about the plan.
Source: “A City Invokes Seizure Laws to Save Homes,” The New York Times (July 30, 2013)
Updated: November 23, 2020