City's Fix for Mortgage Crisis: Seizing Home Loans by Eminent Domain
Doris Ducre of Richmond, Calif., is like millions of other homeowners in this country. She works a 9-to-5 job. She pays her bills. She's current on her mortgage. But Ducre (pictured above) feels like a renter in her own home because she's not gaining equity. "My home is underwater," she tells AOL Real Estate.
The four-bedroom, two-bath ranch-style home that this laboratory technician's family purchased for $300,000 in 1998 is now worth about half its value, she estimates. The same goes for many of her neighbors in this 33-square-mile town just outside of San Francisco. About 49 percent of Richmond homeowners with a mortgage have a dwelling that's worth less than the mortgage owed on it. City data reveals that more than 78 percent of the housing units have mortgages.
Officials in Richmond say that situation is untenable and want to seize about 620 underwater mortgages under eminent domain and give them back to the homeowners at a reasonable value. The program's intent is to help homeowners like Ducre -- and like Rodney Conway, who bought his home in 2004 for $340,000 and says that it's now worth about $140,000. Richmond is the first city to adopt such a plan using eminent domain, a law that typically allows government to seize land for public use -- such as when it wants to expand a road or allow for a commuter rail line to pass through town. Other local governments have considered it, though, most notably San Bernardino County in Southern California, where a proposal for it was ultimately rejected early this year.
The lending industry, including the Mortgage Bankers Association, strongly opposes the idea. "Using eminent domain to seize mortgages will result in tighter, more expensive credit for potential homebuyers and those looking to refinance, driving down home values and threatening local economic recovery," said David Stevens, the MBA's president and CEO.
In announcing Richmond's action, Mayor Gayle McLaughlin said at a Tuesday news conference: "After years of waiting on the banks to offer up a more comprehensive fix or the federal government, we're stepping into the void to make it happen ourselves." To accomplish this, the city is joining with Mortgage Resolution Partners, or MRP, an investment firm that tried and failed to push this solution in a half dozen other communities across the U.S. Richmond is its first win.
"In Richmond, I see political and community leaders courageous enough to wage this battle," said Steven Gluckstern, the chairman of MRP, who promises that this untested idea will save residents' homes and help improve the local economy.
In essence, the private investor would step in and offer to buy the mortgage from the lender at the current market value. The lender would more than likely take a loss from the amount of mortgage that is due (not too unlike when it takes a hit in a short sale, except that now the lender does not have the option to resell the home on the open market to help recoup its loss). However, the lender would not have to go through the financial strains of foreclosing, which could include court costs with the owner, an auction sale, and a commission to the real estate agent. Once the private investor, in this case, Mortgage Resolution Partners, and the city obtain the mortgage, the city would hold the mortgage note until the homeowner can refinance.
"The homeowner who refinances never loses ownership of the house, so never has to purchase their home back. The city buys the loan, not the home, then the homeowner refinances," John Vlahoplus, founder and chief strategy officer of MRP said in an interview with AOL Real Estate. "This is just like a regular refinance except that he or she only has to refinance for a reduced principal balance. The city accepts a reduced payoff of the old loan."
Although the city is accepting a reduced payoff of the old loan, the new loan would still be for more than what it paid the lender, and that's how the investors make a profit. Still, the homeowner would have to qualify for a new loan the traditional way.
For someone like Ducre, that may not be an issue. Some other homeowners in this town, with a nearly 12 percent unemployment rate, according to the most recent available data, may not find it as easy to qualify for a conventional loan. For those homeowners with more challenging credit rating or income, Vlahoplus has an answer.
"Those homeowners would qualify for a regular refinance loan, likely one guaranteed by the FHA under a program that encourages principal reduction on old loans," said Vlahoplus.
On Monday, Richmond officials 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 not accepted, the letter said, Richmond may use the power of eminent domain to condemn the mortgages and seize them anyway, paying court-determined fair market value, reported the San Francisco Chronicle. If successful, the number of homes that the city would rescue is just a fraction of the nearly 4,600 underwater homes in Richmond.
"Why not give the little person some relief?" Ducre told San Francisco's KGO-TV. Ducre says that she does not know if her home is on the list, but in describing the situation in Richmond, she told AOL Real Estate: "There are some people who are behind on their mortgage. There are some people who are not behind. There are some people who are going through the foreclosure process as we speak.
"Regardless of what category they fall in the banks should give that person an opportunity to stay in that home and not be gouged," she said. "Wall Street has gotten some help, so why not help us."
Ducre has become an unofficial spokesperson for the community, in part because of the media coverage and her knowledge of the situation. She says that what she learned came from being "just a member" of the Alliance of Californians for Community Empowerment, which touts that it works with city and state officials to implement strategies that encourage lenders to modify more loans. It also supports the efforts of the MRP.
Richmond City Manager Bill Lindsay invited Gluckstern to sell the city on the idea after he heard the MRP chairman speak at a Contra Costa County meeting of top public administration officials, reported the Contra Costa Times. Gluckstern told the paper that his goal is to make money, but to do so in a way that saves struggling homeowners and improves the local economy.
MRP's Vlahoplus said using eminent domain to help families remain in their homes is appropriate and may be the only way to stop the underwater mortgage crisis from continuing to devastate local communities.
"Our opponents believe that it is appropriate to use eminent domain to acquire a house to widen a road, moving a couple out of the home in which they raised a family and a neighborhood of lifelong friends, but it is appalling and abhorrent to purchase loans to save that very home and neighborhood from destruction," Vlahoplus said. "It is appalling and abhorrent that our opponents plan to needlessly foreclose on millions of American families and evict them from their homes."
The MBA's Stevens told AOL Real Estate in an email interview that: "The program is a short-term solution for a few underwater borrowers that will have severe negative long-term costs for every homeowner in the city."
Separately, in a release announcing the MBA's support of a bill by U.S. Rep. John Campbell (R-Calif.) to limit the ability of local municipalities to use eminent domain to seize residential mortgages, Stevens said: "Cramming losses down on existing mortgage backed securities holders will drive down the value of millions of Americans' investments, including pension plans, mutual funds and 401(k) retirement accounts."
Ducre says that she believes that the banks are just afraid that Richmond will succeed, because if so "other cities will get the strength and say 'if they can do it we can do it.' "
Her advice to other homeowners in her situation: "Have the faith to get organized. Band together and get the politicians on your side, as far as your mayor and your city go. Let the banks know that you are there and that you are serious about getting the homes down to the market rate."
See more on underwater mortgages:
Underwater Borrowers Becoming Accidental Landlords
2 Million Underwater Homeowners Rose From Negative Equity in 2012, Report Says
Strategic Default Has a Hidden Cost You Might Not Be Willing to Pay
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