Banks Threaten to Punish Cities that Use Eminent Domain to Help Underwater Homeowners

Sunday, August 04, 2013

Roughly half the homeowners in the Bay Area city of Richmond are underwater on their mortgages, but city officials have come up with a plan to float them to safety, much to the consternation of banks and other moneyed interests.


The city is strongly considering using the power of eminent domain to seize the homes, which are worth less than the amount owed on the mortgage, and sell them back to the owners at fair market prices. Richmond, a poor city by most measurements, has not benefited much by the recent surge in housing prices and many of the homeowners owe three or four times as much as the home is worth, according to The New York Times.


It would be the first city in the nation to use eminent domain in this fashion. But they certainly aren’t the only city that would benefit immensely from the strategy. A lot of cities with low-income minority populations were sold a ton of predatory loans that shouldn’t have been offered, and the Times says at least two dozen are actively considering the move.


Banks—which make money by selling the homes to lenders in the secondary market, who then make money by foreclosing on the homes and reselling them—have promised to block the city with lawsuits. They promise an end to lending in the city if it persists in its plan.


On July 29, the city, according to Carolyn Said of the San Francisco Chronicle, “sent letters to 32 banks and other mortgage holders offering to buy 624 underwater mortgages at discounts to the homes’ current value. If the offers are spurned, the letter said Richmond may use the power of eminent domain to condemn the mortgages and seize them, paying court-determined fair market value.”


The current market value of the 624 homes is about $177 million, but the face value of their mortgages is $242 million. Richmond has given the loan holders until August 14 to sell the homes.


As explained by Shaila Dewan of The New York Times:    


“In a hypothetical example, a home mortgaged for $400,000 is now worth $200,000. The city plans to buy the loan for $160,000, or about 80 percent of the value of the home, a discount that factors in the risk of default. Then, the city would write down the debt to $190,000 and allow the homeowner to refinance at the new amount, probably through a government program.”


The city and investors would take $30,000 and use it to for expenses and a small profit, while the homeowner ends up with $10,000 in equity.


The banks and secondary lenders would lose a cash cow that relies on the suffering of homeowners. At stake are more than just the primary mortgages. There are $450 billion in second liens and equity loans on bank books that could be affected. The lenders have called the eminent domain tactic illegal and unconstitutional, and an array of heavy hitters, including the Securities Industry and Financial Markets Association, the American Bankers Association and the National Association of Realtors, have lined up in opposition.


Besides threatening court action, they are seeking legislation at the state and federal level to snuff out the nascent movement, and revving up advertising campaigns to argue their case.


However, as David Brodwin of U.S. News and World Report put it, “it's hard to see why bailing out homeowners with a program of this sort is any less an affront to the principles of capitalism than bailing out banks that made bad investments in mortgage backed derivatives.”

-Ken Broder


To Learn More:

Richmond's Pioneering Eminent-Domain Threat (by Carolyn Said, San Francisco Chronicle)

A City Invokes Seizure Laws to Save Homes (by Shaila Dewan, New York Times)

California City Seizes Homes to Save Them (by Ilyce Glink, CBS Money Watch)

One City's Bold Plan to Prevent Foreclosures (by David Brodwin, U.S. News and World Report)


Daver 10 years ago
Sure didn't see these bank groups lining up to defend Kelo now did we? "Unconstitutional" you say? Yeah, when you take a loss...
myfree77 10 years ago
Typical cash reserve requirements in various countries is 0-5% (Yes zero too like Canada, Australia, US etc.) If banks keep re-loaning other's money over and over again (typical of fractional reserve) do they then have a right to foreclose? I think it is a fraudulent system because they make it appear to people that their money is safe in the banks when it is not and operated like a high risk investment account. Also who gives them the right to print more money (devalue) without permission from depositors? It is as good as taking money from my account without asking/telling me. If you calculate savings % and subtract devaluation by printing, did you earn anything? City is doing right and I hope it doesn't buckle. What would be better is if either US or individual states start printing their own currencies and do away with fractional reserve & federal reserve altogether
snowbee 10 years ago
So long as there are consumers willing to buy homes in Richmond, there will never be an absence of lenders to rob them. Let them leave. they'll be replaced by more vultures immediately.
Carl Collicott 10 years ago
All the home forclosures in California are illegal. The banks need a court order to foreclose on real property. California Code of Civil Procedure sec. 726 § 726. Form of action; procedure Form of action; judgment. There can be but one form of action for the recovery of any debt, or the enforcement of any right secured by mortgage upon real property,which action must be in accordance with the provisions of this chapter. In such action the court may, by its judgment, direct the sale of the encumbered property (or so much thereof as may be necessary), and the application of the proceeds of the sale to the payment of the costs of court, ……
Michael Rivero 10 years ago
Commercial banks stop lending? That might actually be a good thing! It might kick off a push for more state banking!

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