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Critics warn against city’s plan to use eminent domain on underwater mortgages

The mayor of Richmond, California announced a plan to invoke eminent domain in an effort to stave off foreclosures, but critics are loudly criticizing the unpopular move.

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California city invokes eminent domain

In an effort to save underwater homeowners from foreclosure, the mayor of Richmond, California has invoked eminent domain, announcing and immediately defending a plan to seize underwater mortgages from investors and re-offer them at fair market value to struggling homeowners.

The theory is that residents are paying on mortgage balances substantially higher than the current value of the home, forcing them into foreclosure, and as they approach foreclosure, they are no longer keeping up payments, and with foreclosures and vacancy rates going up, local leaders theorize that crime will also increase.

Critics far outnumber supporters

Aside from some fringe advocacy groups and the local mayor, it is difficult to find much support for this move, and critics are vocal against the move. Aside from questions about constitutionality, the city’s decision to partner with Mortgage Resolution Partners (MRP), a San Francisco investment firm which will help obtain the funding to buy the underwater mortgages from current holders, and when they are unwilling to sell, the city would invoke eminent domain and seize the properties.

MRP could make big bucks from the deal when the loans are refinanced, and questions surround the very organization which is less than a year old, established by Phil Angelides who was the Chair of the Financial Crisis Inquiry Commission that investigated the events leading to the economic crash, which is not controversial, but his name may ring a bell for his losing his bid for Governor of California to Arnold Schwarzeneger. The campaign was allegedly dirty, with Angelides’ campaign illegally obtaining and releasing private communications from Schwarzeneger, so his critics still feel raw from the situation.

With the government facilitating a single investment firm to make a great deal of money from forcefully restructuring private citizens’ mortgages and receiving a fee for every loan it touches, critics warn that this move benefits one firm rather than benefiting taxpayers as a whole, or even the government itself. According to Reuters, Angelides told potential investors they might see a 20 percent annual return.

MRP is owned by Steven Gluckstern, the current Chairman of Ivivi Health Sciences LLC, a privately financed San Francisco based medical technology firm and formerly a partner at Azimuth Trust Company LLC, an alternative asset management firm he co-founded in 2002, with years working for Warren Buffett under his belt. Other MRP founders include a former Senior VP at Bank of America, and a lawyer who did business development at Zurich Financial Services Group, BNP Paribas, and Credit Suisse. Some call it a who’s who of insiders.

Richmond is not the only city MRP is working with; they have proposed their plan in other cities touched by the housing crisis, and while San Bernadino County, California said no to the plan earlier this year, the city of North Las Vegas is still considering invoking eminent domain with MRP’s help.

The bill that could block other cities from following

Recently, Representative John Campbell (R-CA) reintroduced his 2012 Defending American Taxpayers from Abusive Government Taking Act bill into the House.

If approved, the Act would “prohibit Fannie Mae and Freddie Mac from purchasing, the FHA from insuring, and the Department of Veterans Affairs from guaranteeing, making, or insuring, a mortgage that is secured by a residence or residential structure located in a county in which the State has used the power of eminent domain to take a residential mortgage.”

California Association of Realtors responds strongly

The California Association of Realtors tells AGBeat that they oppose the use of eminent domain as proposed by MRP.

“C.A.R. believes the seizure of mortgage loans from one private entity to sell to another private entity fails the ‘public use’ requirement of eminent domain. Seizing these mortgages will deter lending in those communities that implement eminent domain because future mortgage notes would be vulnerable to seizure. The result would be at best, an increase in the cost of funds and at worst, a prohibition of some or all government-backed loans in an area.”

“The only party that would directly benefit financially from every note seized is MRP, while Richmond residents are left to deal with the high cost or lack of mortgages for years to come. Moreover, their proposed compensation falls short of providing fair market value of the property by offering 20 percent less than the current appraised value.”

Mortgage Bankers Association criticizes the plan

David Sterns, CEO of the Mortgage Bankers Association said in a statement, “The program is a short-term solution for a few underwater borrowers that will have severe negative long-term costs for every homeowner in the city. Mortgages in Richmond will become more expensive, making neighboring cities more desirable for prospective home buyers, which will hold down home values for everyone in Richmond.”

Sterns added, “In short, the program is ill-advised and likely unconstitutional and will add to Richmond’s problems rather than solve them.”

Association of Mortgage Investors call it a tax

The Association of Mortgage Investors (AMI) strongly condemned the plan, calling it “an eminent domain tax.” In a statement, AMI said, “The scheme is designed around benefiting a private investment firm, which is registered with the S.E.C. Mortgage Resolution Partners is not Robin Hood. MRP is a for-profit business that runs an investment fund.”

The statement continued, “However, this fund does not make investments in the free market. Its business model depends on persuading local governments to use the blunt instrument of eminent domain to take money away from the investments of seniors, unions, and others in the mortgage market, give that money to MRP, and, as a result, lower property values across communities as rates on new mortgages go up.”

The Association’s research shows the overall impact of invoking eminent domain in Richmond will be dramatically negative as it limits credit availability by increasing risk and thereby increasing the cost of borrowing. AMI says the plan will only help 198 homeowners in Richmond, representing 0.5 percent of all households, “while harming everyone else.”

AMI Board President, Vincent A. Fiorillo asserts the city’s plan will harm the local housing market.

“The Mayor of Richmond claims she is fighting Wall Street,” Fiorillo said, “but she is really harming the public pensions of teachers, firemen, and first-responders – as well as raising uncertainty as to the true cost of future mortgage lending. By doing so and approving the MRP plan, the community has added an additional credit cost and limited housing finance availability.”

Tara Steele is the News Director at The American Genius, covering entrepreneur, real estate, technology news and everything in between. If you'd like to reach Tara with a question, comment, press release or hot news tip, simply click the link below.

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3 Comments

3 Comments

  1. Erin Round

    August 1, 2013 at 9:56 am

    Either way perhaps this will help evolve and enhance the current ‘lack-of’ systems in place. The banks when handling short sales still seem shaky to say the least! Something out of the box might be what we need to at least get to a better way of handling things.

    • IndependentVoter

      August 2, 2013 at 7:21 pm

      There is nothing positive at all about a bald faced grab for mortgage investor’s (read non-voters) money by elected crooks lining the pockets of the well connected. I hope they grab the mortgages and the conservative Supreme Court later says the crooks (city) and their accomplices have to pay face amount times three (unfair business practices since this is not a legit purpose or power of gov’t and they and accomplices are carrying on a for profit business) plus legal fees. I know I’m dreaming but it would be appropriate.

  2. IndependentVoter

    August 2, 2013 at 7:23 pm

    “The theory is that residents are paying on mortgage balances substantially higher than the current value of the home, forcing them into foreclosure”. No, what forces someone into foreclosure is not making the payments they agreed to make. The value of the collateral is immaterial.

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Austin

Austin tops the list of best places to buy a home

When looking to buy a home, taking the long view is important before making such a huge investment – where are the best places to make that commitment?

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(REALUOSO.COM) – Let us first express that although we are completely biased about Texas (we’re headquartered here, I personally grew up here), the data is not – Texas is the best. That’s a scientific fact. There’s a running joke in Austin that if there is a list of “best places to [anything],” we’re on it, and the joke causes eye rolls instead of humility (we’re sore winners and sore losers in this town).

That said, SelfStorage.com dug into the data and determined that the top 12 places to buy a home are currently Texas and North Carolina (and Portland, I guess you’re okay too or whatever).

They examined the nerdiest of numbers from the compound annual growth rate in inflation-adjusted GDP to cost premium, affordability, taxes, job growth, and housing availability.

“Buying a house is a big decision and a big commitment,” the company notes. “Although U.S. home prices have risen in the long term, the last decade has shown that path is sometimes full of twists, turns, dizzying heights and steep, abrupt falls. Today, home prices are stabilizing and increasing in most areas of the U.S.”

Click here to continue reading the list of the 12 best places to buy a home…

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Housing News

Average age of houses on the rise, so is it now better or worse to buy new?

With aging housing in America, are first-time buyers better off buying new or existing homes? The average age of a home is rising, as is the price of new housing, so a shift could be upon us.

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The average home age is higher than ever

(REALUOSO.COM) – In a survey from the Department of Housing and Urban Development American Housing Survey (AHS), the median age of homes in the United States was 35 years old. In Texas, homes are a bit younger with the median age between 19 – 29 years. The northeast has the oldest homes, with the median age between 50 – 61 years. In 1985, the median age of a home was only 23 years.

With more houses around 40 years old, the National Association of Realtors asserts that homeowners will have to undertake remodeling and renovation projects before selling unless the home is sold as-is, in which case the buyer will be responsible to update their new residence. Even homeowners who aren’t selling will need to consider remodeling for structural and aesthetic reasons.

Prices of new homes on the rise

Newer homes cost more than they used to. The price differential between new homes and older homes has increased from 10 percent traditionally to around 37 percent in 2014. This is due to rising construction costs, scarcity of lots, and a low inventory of new homes that doesn’t meet the demand.

Click here to continue reading this story…

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Housing News

Are Realtors the real loser in the fight between Zillow Group and Move, Inc.?

The last year has been one of dramatic and rapid change in the real estate tech sector, but Realtors are vulnerable, and we’re worried.

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Why Realtors are vulnerable to these rapid changes

(REALUOSO.COM) – Corporate warfare demands headlines in every industry, but in the real estate tech sector, a storm has been brewing for years, which in the last year has come to a head. Zillow Group and Move, Inc. (which is owned by News Corp. and operates ListHub, Realtor.com, TopProducer, and other brands) have been competing for a decade now, and the race has appeared to be an aggressive yet polite boxing match. Last year, the gloves came off, and now, they’ve drawn swords and appear to want blood.

Note: We’ll let you decide which company plays which role in the image above.

So how then, does any of this make Realtors the victims of this sword fight? Let’s get everyone up to speed, and then we’ll discuss.

1. Zillow poaches top talent, Move/NAR sues

It all started last year when the gloves came off – Move’s Chief Strategy Officer (who was also Realtor.com’s President), Errol Samuelson jumped ship and joined Zillow on the same day he phoned in his resignation without notice. He left under questionable circumstances, which has led to a lengthy legal battle (wherein Move and NAR have sued Zillow and Samuelson over allegations of breach of contract, breach of fiduciary duty, and misappropriation of trade secrets), with the most recent motion being for contempt, which a judge granted to Move/NAR after the mysterious “Samuelson Memo” surfaced.

Salt was added to the wound when Move awarded Samuelson’s job to Move veteran, Curt Beardsley, who days after Samuelson left, also defected to Zillow. This too led to a lawsuit, with allegations including breach of contract, violation of corporations code, illegal dumping of stocks, and Move has sought restitution. These charges are extremely serious, but demanded slightly less attention than the ongoing lawsuit against Samuelson.

2. Two major media brands emerge

Last fall, the News Corp. acquisition of Move, Inc. was given the green light by the feds, and this month, Zillow finalized their acquisition of Trulia.

…Click here to continue reading this story…

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