Eminent Domain Proposal in Richmond, CA Advances

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The vituperative reaction of Wall Street and business commentators to the plan of Richmond, California regarding “underwater” mortgages has been something to watch. The small city, population 106,000, has written to 32 banks and mortgage companies offering to purchase the mortgages on 624 homes at their underwater fair market value—that is, what they are worth even though it is less than the stated value of the mortgage—or, if the banks and mortgage companies refuse, to acquire the mortgages through the city’s use of its eminent domain powers.

The banking industry and, even moreso, the mortgage securitization industry (those entities that package and resell blocs of mortgages as securities to investors) have gone almost nuclear. The for-profit investment company that is promoting the idea—Mortgage Resolution Partners, chaired by former Lehman banker Steven Gluckstern—has been roundly denounced by real estate brokers and by bankers, with the obvious insinuation that MRP is supporting Richmond’s strategy as a profitable business strategy for itself rather than having concern for the homeowners who are paying mortgages far larger than their properties are worth. In truth, MRP will make money, charging $4,500 per loan according to its business model, as it basically fronts or finds financing for the city’s acquisition costs of the mortgages and arranges for their sale to new investors, resulting in significantly lower mortgage payment costs for the mortgagors.

You might easily insert “pointy-headed perfesser” into the denunciations of the Cornell law professor, Robert Hockett, who is credited with the eminent domain idea for underwater mortgages. The term of art used by Hockett’s critics in Forbes is “cooked up in a law professor’s office.”

Richmond’s legion of nonprofit supporters doesn’t include many of the big national mainstream nonprofits that, even in the reinvestment advocacy world, are funded by the banks themselves. Richmond’s nonprofit supporters include, however, a bevy of labor unions, typically affiliates of the Service Employees International Union (SEIU), a helping of community organizing groups such as the PICO National Network and National People’s Action, and grassroots groups such as the Home Defenders League, whose sharp critique of Wall Street and frequent press association with Occupy Our Homes stirs up business palpitations that the movement to use eminent domain to take mortgages at their fair market value and save homes for their homeowner occupants is really Occupy Wall Street reborn as an activist movement with a coherent policy agenda.

The reality is that the governing body of Richmond, headed by a Green Party mayor, is doing what the Obama administration wouldn’t do for fear of having to do battle with banks and with the protectors of purchasers of mortgage-backed securities—namely, Fannie Mae and Freddie Mac. Richmond is standing up to capital.

Richmond is also turning eminent domain on its head. Unlike the much-publicized and very contentious examples of eminent domain, which generally displace existing residents, as in the case that found its way to the U.S. Supreme Court in Kelo v. New London, Richmond will be using its eminent domain powers to protect existing occupants, who, in this city, are more often than not working-class or lower-middle-income and likely to be people of color. Typically, eminent domain takes on behalf of rich developers. Disabuse yourself that eminent domain simply grabs properties and leaves investors or owners with nothing; if the mortgage holders and the city cannot reach an agreement over the sale price, eminent domain turns the proceeding over to the courts for their determination of fair market-value compensation.

And the attacks on the plan are straight out of the corporate playbook against Occupy. For example, according to Josh Harkinson at Mother Jones, the Association of Mortgage Investors characterizes the MRP plan as “simply a wealth transfer from everyday Californians to a handful of wealthy, well-connected investment bankers.” (Gluckstern once headed a $4 billion private equity fund, and the CEO of MRP is the former VP of residential lending at Bank of America.)

Then, there are the attacks that ignore reality. For example, Forbes writer Kevin Fisher suggests that MRP and Richmond have “conveniently” defined the market value of these properties as “an amount significantly less than can be lent against the property in a refinancing.” But that’s exactly what’s happening. That is the definition of “underwater”: The nominal value of the mortgage is more than the property is actually worth. As a result, mortgage holders, particularly holders of securitized mortgage instruments, won’t refinance at the lower—actual—fair market value. Other Forbes critics question how the municipal fisc of Richmond benefits, but the four votes in favor of the MRP eminent domain plan aren’t looking for a killing or a huge redevelopment property tax benefit, but for a way of keeping residents in their homes as opposed to having them foreclosed by unseen mortgagees. If the city takes a haircut on the deals (which, hopefully, it will be able to structure so that it won’t), it is doing what government should do: protecting people, rather than protecting the interests of capital.

The organizing for and against is particularly interesting. Opponents of the eminent domain plan rounded up local college kids, gave them red “a bad deal for Richmond” T-shirts, and had them wave “stop investor greed” placards, while supporters handed out yellow T-shirts with “yes on Richmond CARES” stickers. But the opposition is also lined up in court. For the last few months, Wall Street has traipsed into federal court threatening all kinds of problems for the city, led by filings by Wells Fargo and Deutsche Bank, and they have been joined by a surprising ally: the Federal Housing Finance Agency, which oversees and regulates Fannie and Freddie. MRP is willing to foot Richmond’s legal bills, but won’t indemnify the city if the courts rule against it and exact costly penalties. A small coalition of nonprofits, however, including the California Reinvestment Coalition, the National Housing Law Project, Housing and Economic Rights Advocates, Bay Area Legal Aid, and the Law Foundation of Silicon Valley, has filed an amicus against Richmond’s Wall Street adversaries.

This is a big test for nonprofits. There are plenty of nonprofits in the housing and community development industry that have long been on record in favor of principal write-downs on underwater mortgages, but as they have cut deals with banks, their apparent absence from Richmond’s struggles is concerning. The city is 40 percent Latino and 25 percent black, but the banks are saying that if Richmond goes ahead with the takings, there would be an adverse effect on minority home mortgage borrowers, implicitly suggesting that the banks will stop lending (and Fannie and Freddie will stop purchasing mortgages) if they don’t stop the city in its tracks. The test for nonprofits is whether they will stand with capital—and, sometimes, the corporate philanthropic interests associated with capital—or with people in need, even if the profit margins of big banks and mortgage companies have to take their own haircuts in order to mitigate or prevent the wholesale displacement of otherwise stable homeowner-occupied neighborhoods in working-class cities.—Rick Cohen

  • Charlles Fetters

    The Mayor and the city council members are going to put Richmond in bankruptcy.
    What the city should be doing on behalf of the homeowners, is use their bank of lawyers to sue the major banks for defrauding the homeowners in the beginning. The city, several years ago invited the major banks to encourage homeowners to apply for low interest loans, which was held at the city hall. These events happened on weekends.
    Then with a few months families were moving in to Richmond buying homes for low down payments, low interest rates. I know this because my neighbor changed drastically. Many hispanic’s move over night.
    The city of Richmond, like many cities and counties are constantly telling the citizens they are lacking taxes to operate the police departments, schools, and other public services. This is where the counties failed to collect the recording fees each and every time the banks securitized the mortgage notes.
    So the city needs to go to the county and search the records to establish the millions of dollars the banks failed to pay on each and ever transaction. This is money that was stolen from the taxpayers by the banks.
    We have just stopped the 41st foreclosure on our home. I have learned the complete process the banks have used to steal and defraud all cities, counties, and homeowners over the past five years.
    Again the mayor is on the wrong track trying to save the homeowners.
    I must mention the investors the city plans to use to perform this miracle are the same bankster crooks that got homeowners in this nightmare.

  • Robert

    That is what thay said about Iceland. and now look.

  • jensational

    “What the city should be doing on behalf of the homeowners, is use their bank of lawyers to sue the major banks for defrauding the homeowners in the beginning”

    You are absolutely right! It was the banks and the feds that made this happen, they ought to be responsible!


    instead of seizing mortgages why doesn’t the city of Richmond guarantee the price of homes in the city for what the homeowner paid? if someone can’t pay their mortgage they could sell their home. if the house sells for less than the original purchase price, the owner would receive a check for the difference from the city. a plan like this would provide a floor, a price support for all homes in the city and would in turn support the current level of real estate taxes , most of which go to education. a similar plan was tried in chicago in the 1980’s in areas that were undergoing so called “white flight’. the plan worked and home prices and the neighborhoods were stabilized.

  • michael

    Advocating government eminent domain powers to achieve some type of lofty social justice ideals is a dangerous, dangerous thing to do. Nonprofits should vigorously oppose because their mere existence is frequently dependent upon government money and always dependent upon the blessings of bureaucrats.

    Once you leave that loaded pistol lying around don’t be surprised when one day it is pointed right in your face.

  • D Chew, Philadelphia

    It is interesting that you characterize the misgivings that some non profits have about the use of Eminent Domain the way it is being structured in Richmond as as result of “deals cut with banks.” You completely ignore the questions some groups have about MRP, the hedge fund group that will finance the new mortgages. Forgive the non profits who do know very well the banks “they make deals with” and do not trust anyone on Wall Street including those who ride in on dazzling horses claiming they seek only a humble recompense for their efforts.

    Housing counselors who deal day in and day out with people whose mortgages are in trouble also have questions about what work will be done and what money will be allocated to help home owners get fit and stay fit with the new mortgages. Remember, many people lost jobs, are years behind on their mortgages and cannot make even reduced payments. There are also some questions about whether the move will include mortgages that are not performing, as in currently delinquent. It is great that this plan could help people who are underwater, but let’s not pretend that this is going to save the neediest homeowners.

    This fight needs all the help it can get and if Eminent Domain turns out to be one piece of the machine that begins to keep people in their homes, fabulous! But don’t vilify the people who see the good intentioned but botched settlements and hastily thrown together programs give people hope and later leave them high and dry. Don’t vilify the skeptics because they do not trust MRP and the same Wall Street Types that got us into this mess.