Eminent domain on underwater mortgages?
We’ve heard of cities invoking eminent domain for initiatives such as parks and roads – things generally assumed to benefit the public good. But the city of Richmond, California announced a plan Tuesday to go rogue and utilize eminent domain to seize underwater mortgages from investors and then re-offer them at fair market value to struggling home owners.
The reasoning behind this decision is that homeowners are paying on mortgage balances that are substantially higher than the market value of the home, causing home owners to become delinquent on their payments and foreclose. The closer that these home owners come to foreclosure, they less incentivized they are to keep up with payments, and higher counts of vacant, foreclosed properties lead to crime.
Mayor defends program
This would result in a loss for the investors who currently back these mortgages, but the city of Richmond says if the two parties are unable to reach an agreeable solution by August 14, it will invoke eminent domain to take control of these mortgages.
“They can put forward as much pressure as they would like but I’m very committed to this program and I’m very committed to the well-being of our neighborhoods,” said Gayle McLaughlin, current mayor of the city of Richmond.
How the program is operating
Mortgage Resolution Partners is currently managing the plan and is offering to buy both current and delinquent mortgage loans. After seizing a property, MRP would reduce the amount of the mortgage closer to the actual value of the home – for instance, taking a $400,000 mortgage on a home that is only worth $300,000, and purchasing it for $240,000. Once the city has control of that mortgage, it would allow home owners to finance the property at an amount slightly higher than the purchase price, say at a price point of $270,000.
That extra $30,000 in profit would go back to the city and the investors who bought the loan, and according to Richmond government officials, both the city and its residents would essentially be better – the city makes a profit and home owners get to keep their homes and pay a decreased amount that is more in line with market value.
What if this plan goes through?
Should this plan go through, it will serve as a huge deterrent to lenders who currently back mortgages in the Richmond area. Investors can argue that they have the freedom to clearly lay out the rules and expectations of a mortgage agreement and have home owners agree to those terms without having the government step in and seize the investment if it doesn’t agree with the way things are going.
If the use of eminent domain in the mortgage industry becomes the norm, it will certainly shrink the number of investors who are willing to back mortgage loans and could make it more difficult for interested parties to get the funding they need in order to buy a home.