The fight between the City of Richmond, Calif. and 624 mortgage lenders continues, as the city attempts to obtain the loans through eminent domain.
The cities of San Bernadino, Calif. and North Las Vegas, Nev. have also said they might use eminent domain to purchase and refinance mortgages, but both backed off in the face of strong opposition from lenders and realtors.
Currently the Richmond program, dubbed Richmond Community Action to Restore Equity and Stability, is in an effective administrative limbo.
The Richmond City Council voted 4-3 on Sept. 17 to move forward with the plan, according to local media, but conceded to state law that requires a super majority.
If the additional required vote is found and the city invokes eminent domain, it almost certainly faces a legal challenge.
A U.S. District Court judge threw out the lenders’ first legal challenge in mid-September, ruling they have no standing to bring a case until Richmond actually invokes eminent domain and moves to take a loan. If the city does, the banks are expected to revive their complaint.
The mayor and city council of Richmond argue that the city may need to use eminent domain to obtain 624 mortgages the city said is in danger of foreclosure. Should the properties foreclose, it could adversely affect property values and neighborhood stability.
The mortgages at stake were made in working class and lower class neighborhoods during the peak of the mortgage boom. Because they were not sold to Fannie Mae or Freddie Mac, but instead were packaged into private label mortgage backed securities, there were not eligible for refinancing under the HARP 2 program.
Once obtained, Richmond would work with a private firm, Mortgage Resolution Partners, and homeowners to restructure and refinance the loans at more current market values. It would then sell them to other investors MRP would help recruit.
The city of Richmond is expected to make a profit on each deal, and MRP will earn a $4,500 fee for each mortgage it helps refinance.
Opponents say that the city and MRP stand to make money on what will amount to little more than unconstitutional seizure of private property for an unclear public use.
In court documents, banks and investment firms said the city targeted performing mortgages and homeowners who are not in immediate default risk.
The lenders say they also stand willing to help homeowners modify their loans if they do go into default, and that they have done for other Richmond homeowners.
Home values in Richmond rose by 20% last year and are expected to rise another 20% this year, which could elevate some homeowners from underwater status.
The Federal Housing Finance Agency said it opposes the idea.
However, supporters vigorously contend the move would help preserve long term value for the entire community by limiting foreclosures and preserving neighborhoods.
John Vlahoplus, MRP founder and chief strategy officer, said in an email it doesn’t make any policy sense for a government to let neighborhoods atrophy due to foreclosures. Not only does the neighborhood suffer, crime and blight could spill over into adjacent areas.
“The only difference is that the government must take into account potentially competing interests when it considers condemning loans from ongoing institutions that refuse to sell the loans. But that is government’s role and its right under our constitutional system of government,” he said.
But there are other problems as well.
In an amicus curae brief it filed in conjunction with the other financial associations, the California Credit Union League suggested that homeowners who take part in the program might well face additional tax liability because the IRS has required them to report debt forgiveness as income.
The league also suggested the city could get stuck holding a bag of unwanted loans.
“New private lenders almost certainly would not make the new loans without title insurance that covered the issues raised by this action,” the League said in the brief. “As a result, the City of Richmond may be stuck as the owner of a portfolio of first loans seized by eminent domain that cannot be refinanced and which the city cannot afford to own on an ongoing basis.”
Diana Dykstra, president/CEO of the CCUL, said the real issues are precedent and the idea of adopting a tactic which will only wind up destabilizing the mortgage market and, ironically, hurting the very people the program is meant to help.
“Housing prices go up, housing prices go down,” she said. “Now every time there is a market correction should a homeowner be able to run to their elected officials to their loan principal reduced?”