After a seven-hour meeting that dragged into early Wednesday morning, the Richmond City Council voted 4-to-3 to continue pursuing its plan to condemn underwater mortgages using the city’s eminent domain power. The development is just the latest in an ongoing and high-stakes dispute over a novel property law argument.
Here is the background: The city of Richmond, California, has long-faced deteriorating property values. Once a shipbuilding powerhouse for the U.S. Navy during World War II, the region’s declining industrial based has hit Richmond particularly hard. City leaders have struggled to attract redevelopment capital, as businesses have largely opted for other booming Bay Area locations. And when the mortgage crisis hit, Richmond’s communities experienced rampant foreclosures.
In response, the City has considered a novel move: mortgage condemnations through the power of eminent domain. That is, the City’s proposl would condemn the underwater mortgage obligations, but not the real estate itself. If implemented, banks would be forced to write down large portions of a borrower’s principal. The Network has previously covered the mortgage eminent domain proposal and Mortgage Resolution Partners, which had backed Richmond’s plan. And last September, the Berkeley Center for Law, Business and the Economy and Berkeley Business Law Journal hosted Adjunct Professor Bill Falik—who is a partner at MRP—to discuss the innovative (though controversial) scheme. The Network covered counterarguments as well.
Richmond’s plan (and city leaders’ divided but prolonged support) has created turbulence in the financial sector well beyond the Bay Area. For example, see stories by Reuters, Forbes, Washington Post, and Bloomberg. Mortgage lenders fear that the plan, if implemented, might set the stage for judicial approval of an expanded understanding of eminent domain powers. The San Francisco Chronicle story notes that on “Thursday, Wells Fargo and Deutsche Bank will go to court seeking a preliminary injunction to halt Richmond’s effort on the grounds that it is unconstitutional and would hurt lending.”
And while legal challenges to the concept itself are certainly expected, Richmond has not yet accepted the proposal. The problem? Under California law, eminent domain actions require supermajority support—and Richmond fell one vote short. The City will continue developing its plan, but final approval remains uncertain until another member of the Council supports it.
The Network will stay up-to-date as the mortgage eminent domain story plays out in Northern California and elsewhere.
UPDATE, September 17th, 2013: Wells Fargo and Deutsche Bank’s lawsuit seeking to block Richmond’s plan has been dismissed. U.S. District Judge Charles R. Breyer determined that, because the City has not yet enacted its proposal, the controversy (which he described as “future events that may never occur”) is not “ripe for consideration.” Click here for more.
Earth to Banks–Lower the principle amounts to current appraised value, and the threat of eminent domain goes away. Is the real problem based on arcane accounting practices by financial institutions required by faulty federal regulation?
We Richmonders will stand by our mayor to the bitter end and no matter the cost. Why? We of the so-called middle-class have NOTHING LEFT TO LOSE.
I have become aware of this eminent domain idea of your city.I would suggest another approach, which with the full consent of a potential defaulter, being told of the risk that they could still, in the end lose their home.I would suggest a two pronged approach.First have the actual mortgage contracts, examined and maybe challenged.Here in Australia, whilst the banks are very quiet about the matter, many morgages can be either,lessened or struck out as in many cases fraudulent info about the situations of the morgage payer have been falsified, in order to make the applications look rosier than their actual circumstances would imply otherwise.The second approach I would suggest, is that, not all at once, but in large blocks, the mortgage holders default.Then, your City could either, tender buy for, or buy at auction or buy via distressed ,or special defaulter’s provisions worked out with the mortgagees.Banks don’t say how many defaulters they have, because too many will lower prices, so, they may allow you to buy the houses back at much reduced prices, because if there are large blocks of distressed properties in an area, this factor alone will make them worthless because buyers have great choice as it means a buyers market is in play.The City, could then refinance back to the original morgage owners at a slight premium to present and future ongoing costs.That would mean, if done correctly, City may even make profit over the long term of the loan, but much less than Banks etc do.I have received emails about schemes where they pay you commissions for spotting distressed properties, they buy from the banks at reduced prices, then refinance back to the people that would soon have been thrown out.This approach is not likely to deter investment in your area as is being claimed.Sincerly Mr Dallas Johnson.+61400693811.