Will Eminent Domain Help Underwater Homeowners?

In a bold move fueled by the desperate calls for help from homeowners, the city of Richmond, California, is seeking to buy underwater mortgages and refinance them back to the homeowner at a more affordable cost.

It's an effort to help the severely ailing city. Right now some homes are worth only half of what they once were at the height of the housing bubble. For example, a home once worth nearly $410,000 may now only be worth $200,000. The city claims this is destroying its town and leaving no way for homeowners to keep their properties. The homeless rate is increasing and properties are sitting empty.

The city will attempt to buy the mortgages from the current investors at a price that is below their current value. The city is essentially seeking to buy the mortgages at about 80 percent of the homes' current value which factors in the risk of default. However, if the investors decline, the city is likely to invoke eminent domain to ensure the purchase of the home goes through. Typically eminent domain is used by the government when it is purchasing land that will be used for parks, roads, or utilities-public uses-not usually mortgages which will later be refinanced with the original homeowner for less than what they had owed.

But the city of Richmond is saying that the state of its housing and economy are suffering horribly and this plan would help not only the underwater homeowners but also the entire city. More money would be flowing through the city and the businesses in the area.

The city is planning to work with a for-profit San Francisco company, Mortgage Resolution Partners, to create this local principal reduction plan for underwater homeowners. It's expected to work like this: The city buys the underwater home for fair market value price. The city sells the home back to the underwater homeowner at a reduced market price. So now the homeowner is making a monthly mortgage payment on a home that actually may have a tiny bit of equity in it. The payments are manageable and the for-profit company (MRP) that helped to find the money for the city to purchase the home earns a cut of the deal when the home is refinanced.

If this plan goes through, Richmond will be the first in the nation to invoke eminent domain for a mortgage reduction plan, according to the Los Angeles Times. San Bernardino County and two of its cities in California have already rejected the plan. Richmond Mayor Gayle McLaughlin told the LA Times, "This is a tool to get the job done. The housing crisis is still ongoing."

Hundreds of notices asking investors to sell their mortgages to the city have gone out and are pending responses.

There's likely to be backlash by investors not wanting to part with the properties for less money. Last year, Wall Street groups were very vocal and helped squash the effort when the plan was proposed to San Bernardino County and its cities, Ontario and Fontana.

For now, underwater homeowners in Richmond will continue to tread water as the plan works its way through political bureaucracy.

Published: August 2, 2013
Use of this article without permission is a violation of federal copyright laws