The City of Richmond, California began sending letters to mortgage servicers and trustees offering to buy home mortgages at reduced prices or face eminent domain proceedings.
Richmond is the first city in the nation to try eminent domain as a way to stop foreclosures. In January, San Bernardino County in California decided against a controversial proposal and said that the use of eminent domain would “destabilize the local housing market and even worsen the mortgage crisis.”
On April 2, the City Council of Richmond, CA approved an agreement with the San Francisco-based firm Mortgage Resolution Partners (MRP) to implement a program to use eminent domain to seize and restructure underwater mortgage loans held in private-label MBS trusts.
The principal on the loan would be written down and refinanced into a Federal Housing Authority (FHA) loan with a lower mortgage rate.
Under the agreement, MRP would advise Richmond on the implementation of the program to reduce the impact of the mortgage crisis by "preserving home ownership, restoring homeowner equity and stabilizing the communities’ housing market and economy by allowing many homeowners to remain in their homes." The proposal passed with one dissenting vote.
The City of Richmond’s decision is seen as both unconstitutional and dangerous public policy by those who oppose eminent domain.
"That seems to me to violate the Constitution," said Judd Gregg, SIFMA CEO, discussing the new policy on CNBC this morning. “Private property is at the essence of the market system and the essence of our system that creates prosperity; and you are really threatening the concept of private property when you do this.”
American Securitization Forum executive director Tom Deutsch said in a press release today that Federal and State law shows that the scheme is illegal and over the long-term the decision would make mortgages more expensive for homebuyers.
“Potential homebuyers in Richmond will have to pay more to cover the risk of eminent domain or simply not be able to obtain a loan at all,” said Deutsch.