Using Eminent Domain to Seize Underwater Mortgages to Reduce Foreclosures

Using Eminent Domain to Seize Underwater Mortgages to Reduce Foreclosures.

Has everyone heard about the strategy to use the powers of eminent domain to seize underwater mortgages?  It's a controversial idea that began percolating about a year ago.  The politically well-connected proponent, Mortgage Resolutions Partners LLC (MRP), and other groups are proposing the idea to cities across the country as a means of reducing blight in communities hard-hit by foreclosures.

The idea sounded preposterous because it renders existing mortgage contracts invalid and unenforceable.   Well, preposterous or not, the City of Richmond, CA in the east San Francisco Bay appears ready to be the nation's first to try it.  

Richmond, which has not benefitted from the real estate market rebound, recently sent letters to 32 lenders and loan servicers offering to buy 624 underwater mortgages for 80% of today's market value. That amount is far less than the current loan balances.  The City is threatening to use eminent domain to seize the loans if the lenders don't accept the City's offer.  

Eminent domain is normally invoked by public jurisdictions--cities, counties, states--to forciably acquire real property from private parties by paying fair compensation, and then developing the land for the benefit of the public.  The public benefit of Richmond seizing mortgages presumably would be the reduction in neighborhood blight and the promotion of a healthier local economy by reducing homeowner's debt.  Here's the link to a recent New York Times article. 

Upon seizing the mortgage the home would be refinanced by--you guessed it--the main proponents of using eminent domain for this purpose, MRP.   They would act as mortgage brokers arranging 95% loan-to-value government-backed loans at today's interest rates. Because the City would seize the loan for 80% of today's market value and re-finance for 95%, the 15% profit would go to the City, closing costs, MRP and its partners who put the money up to seize the loans.  

Presto change-o, the homeowner would have 5% equity and lower payments, the City makes money, the mayor and City Council members look like saviors, there's no more city blight caused by underwater homeowners or delinquent borrowers.  

The mortgage holder's loss becomes everyone else's gain, but Richmond must figure that that's what can happen to achieve a public good through eminent domain.

Apparently the Richmond City Council members don't care that the City will be sued by mortgage holders and by others.  The City argues it's a lawful use of eminent domain.  They also don't seem to care that future borrowers will be penalized by higher mortgage rates, or no mortgage credit at all, when mortgage investors factor the risk of eminent domain confiscation into their risk-reward equations.  

 

Lloyd Binen

Realtor/Broker/BRE 572654

Certified Realty Services

19200 Shubert Drive

Saratoga, CA 95070

Certified Residential Specialist (CRS); Graduate, Realtors Institute (GRI)

408-373-4411; e-mail