Richmond, CA is first municipality to use eminent domain on underwater mortgages

Richmond, California’s leaders approved a controversial plan earlier this month to become the first municipality in the nation to use eminent domain to rid itself of underwater mortgages. The plan was approved by the Richmond city council 4-3 following a long and contentious public meeting that began on a Tuesday evening and rolled over into Wednesday’s predawn hours.

Specifically, the council approved Mayor Gayle McLaughlin‘s proposal for city staff to work more closely with Mortgage Resolution Partners LLC (“MRP”) to implement MRP’s plan to use eminent domain to seize and restructure underperforming mortgages as a way to prevent foreclosures. MRP, which is headquartered in San Francisco, is the brainchild of Steven Gluckstern and John Vlahoplus. The company bills itself as a “community advisory firm” working to stabilize local housing markets and economies by keeping as many homeowners with underwater mortgages in their homes as possible.

A Novel Use of Eminent Domain

The MRP plan relies on a somewhat novel use of eminent domain, which is traditionally used to seize land for city planning purposes. Richmond is proposing to seize 624 mortgages valued at more than the homes for which they were written and refinance them at rates more favorable to homeowners. Relying on financing provided by MRP, Richmond would compensate the investors holding the mortgages at a price reflecting the home’s current value rather than the inflated value for which the mortgage was underwritten. The goal of the program is to keep homeowners in their homes with more reasonable mortgage terms, thereby avoiding the possibility of foreclosure and encouraging residents to pay their mortgages and property taxes on a timely basis.

However, Richmond is still far from actually using eminent domain to forcibly acquire the troubled mortgages. By state law, that step would require approval by a super-majority of the city council. Given the outcome of the city council’s vote, it may be difficult for Mayor McLaughlin to garner the five votes required to bring eminent domain actions to state court.

Other municipalities have rejected the plan

MRP has failed to get similar plans approved in other municipalities, most recently in North Las Vegas, Nevada and earlier this year in San Bernardino County in Southern California. However, in Richmond, MRG found an ally in Mayor McLaughlin, a member of the Green Party, who sees working with MRG as a progressive public purpose that would benefit Richmond citizens, who have been hit hard by the housing crisis.

“We’re not willing to back down on this,” Mayor McLaughlin, a former school teacher, told The New York Times last July. “They can put forward as much pressure as they would like, but I am very committed to this program and I’m very committed to the well-being of our neighborhoods.” At last week’s meeting, McLaughlin further explained, “Richmond and its residents have been badly harmed by this housing crisis. The banks have been unwilling or unable to fix this situation so the city is stepping in to provide a fix.”

Opponents of the MRP plan have become increasingly more vocal as Richmond inches closer to implementing the Mayor’s proposal. The Federal Housing Finance Agency announced last month that it would press Fannie Mae and Freddie Mac to limit or cease doing business in municipalities where such proposals have been approved.

Bondholders try to fight back 

BlackRock Inc., Wells Fargo and other bondholders went one step further, filing suit against Richmond, alleging that the city’s plan is unconstitutional and seeking a court order enjoining Richmond from further pursuing the proposal. Two weeks ago, however, U.S. District Court Judge Charles Breyer dismissed the lawsuits, finding that the bondholders’ claims depend on “future events that may never occur.”

It remains to be seen whether the bondholders will appeal Judge Breyer’s decision or renew the suits at a later date. The cases are Wells Fargo Bank v. City of Richmond, Case No. 13-03663 and Bank of New York Mellon v. City of Richmond, Case No. 13-03664, both pending in the U.S. District Court for the Northern District of California.