It was predictable that ABS East would be rife with criticism of the way eminent domain is being used by local governments to seize mortgages.

But a number of participants weren’t particularly concerned about these efforts because they don't expect them to make much headway.

Much of the discussion centered on Richmond, California, which is pushing forward with a plan devised by Mortgage Resolution Partners (MRP) to seize mortgages in this economically troubled city of a little over 100,000.

“It’s trying to solve a problem that doesn’t even exist,” said Nancy Mueller Handal, a managing director at Metropolitan Life Insurance. She argued that, with nearly a third of Richmond homes above water and rising home prices in the area, the plan is a mistake. The targeted properties have loan-value-ratios of about 123. Mueller Handal said that projected house inflation should send that figure down to below 100 by 2015.

“It’s hard to see the proposal makes sense,” said John Arnholz, a partner at Bingham McCutchen. “And that’s before the constitutional challenges.”

Much of the financial industry is fighting against the proposal on the grounds that it is unconstitutional to seize mortgages that are, in effect, outside the purview of the local government. Other objections include that it will be counterproductive, choking off credit because banks and investors will be loath to lend to people living in communities that have seized loans and paid below par for them.

Laurie Goodman, the director of Housing Finance Policy Center at Urban Institute, pointed out that a good number of homeowners in Richmond are current on their mortgages. The real problem plaguing Richmond — as well as in other cities eying MRP’s eminent domain plan — is ultimately one of a deep structural nature, Goodman said. Their economies are weak and not producing enough jobs; the unemployment rate in Richmond is 50%, according to Goodman.

But the eminent domain issue remains popular with some segments in the population, not the least those homeowners who stand to benefit. The “hairball in the throat of the economy” that is underwater homes, according to an MRP official, may not be coughed up so easily. 

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