Calif. City Persists on Controversial Eminent Domain Plan

September 13, 2013

Richmond, Calif., city officials approved a plan this week to use their powers of eminent domain to seize underwater mortgages, a plan they say will help more of its residents avoid foreclosure. 

The controversial plan has already faced lawsuits and backlash from investors who allege using eminent domain to seize underwater mortgages violates the U.S. Constitution. 

Richmond, Calif., city officials voted to work with Mortgage Resolution Partners to start putting the plan into action — which would make it the first city in the nation to seize underwater mortgages via eminent domain. The city plans to approach the trusts of more than 620 delinquent and underwater mortgages with an offer to purchase the underwater homes at a deep discount. If the trusts reject the offer, the city will be able to use eminent domain to gain ownership. After they gain ownership, city officials plan to refinance the mortgage, reduce the loan’s principal, and help home owners stay in their homes at a lower monthly mortgage payment and avoid foreclosure. 

Residents in Richmond have been “badly harmed by this housing crisis,” says Mayor Gayle McLaughlin. “Too many have already lost their homes.” 

Before the vote to move forward on the plan, some city officials expressed concern that the city will face costly lawsuits and backlash from financial institutions if they proceed. City officials voted 4 to 3 in approving the plan. 

Recently, the Federal Housing Finance Agency urged mortgage giants Fannie Mae and Freddie Mac to limit or end its business where eminent domain proposals such as this one are approved. That alone has the potential to close off mortgage financing in cities that adopt such a plan, Reuters reports. 

Some investors, whose mortgages are being targeted by Richmond, have filed a lawsuit to try to block the plan. A federal judge said he would issue a ruling Sept. 16 on whether to order an injunction to stop the city from moving forward. 

Some critics to the plan fear that Richmond’s decision will prompt other municipalities to follow suit, particularly if a federal judge rules it doesn’t violate the Constitution to use eminent domain in such a way. So far, other city governments, such as in North Las Vegas, Nev., and San Bernardino County in Southern California, that had been considering using eminent domain for underwater mortgages have mostly backed away from their plans after facing criticism from the mortgage and real estate industry.

Source: “California City Backs Plan to Seize 'Underwater' Mortgages,” Reuters (Sept. 11, 2013) and “BlackRock Bid to Block Richmond Plan Seen Premature,” Bloomberg (Sept. 12, 2013)

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