|July 16, 2014|
Previously published by California Eminent Domain Law Blog
While the city of Richmond is the first municipality to approve the concept of using eminent domain to acquire underwater mortgages, the city has yet to actually do so.
The City Council has been unable to get the needed 5 out of 7 votes to go through with eminent domain proceedings. Therefore, the city is looking to team up with another municipality in hopes that together a joint powers authority will help carry out the proceedings.
Other cities, however, are reluctant to join in. Reasons for the hesitation comes in two major forms; the first being fear of lawsuits and complex litigation from banks and trusts, and the other being the threat of losing support from the Federal Housing Finance Agency (FHFA).
Other cities take no comfort in the fact that Richmond recently won against the trustees for hundreds of residential mortgage-back securities trusts, mainly because the lawsuits were dismissed without prejudice. This means that after Richmond begins the eminent domain process, the trustees will more than likely file more suits. The potential liability of such lawsuits can carry a very high price tag which deters most cities from joining Richmond’s plan.
Furthermore, the FHFA’s position on using eminent domain for such purpose is another deterrent. The FHFA has made it more than clear it is against the use of eminent domain, arguing that using eminent domain to modify the mortgages would eventually be shouldered by taxpayers. Also, the FHFA fears that it would create credit restrictions for home buyers in the future.
The FHFA is not the only organization against the idea of using eminent domain to seize mortgages. The Securities Industry and Financial Markets Association (SIFMA), the National Association of Realtors, and the American Bankers Association have voiced their opposition as well. The fear is mainly the same; an increase in borrowing costs and restrictions on credit availability.
Richmond says it wants to help its residents come out of the slump that has been affecting many U.S. homeowners since the 2008 housing crisis, but does the city truly have its residents interest at heart? Richmond has been working closely with Mortgage Resolution Partners (MRP), a private investment firm that has been pitching the eminent domain route to numerous cities. The assumption is that if the city does acquire the mortgages, it will turn around and offer the mortgages for a lower price and pocket the interest. Only time will tell what the outcome will be; for now, it is still up in the air. And as the real estate market improves, the ostensible justification for using eminent domain to assist underwater homeowners becomes less and less compelling.