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.”