Earlier this year, the city of Richmond, California, held the dubious distinction of being particularly hard hit by the housing crisis. The city now has grabbed headlines for another reason: It has gone further than any other governmental body so far in considering eminent domain to take underwater mortgages out of securitized trusts. [paragraph] Mortgage Resolution Partners LLC (MRP), San Francisco, is the self-described community advisory firm that has made a name for itself nationwide by promoting not just the hot-button issue of principal reduction--but that and much more through eminent domain. [paragraph] MRP wants local governments to use eminent domain to take underwater but performing mortgages out of private-label securitized (PLS) trusts. The company then facilitates the payoff to current investors, restructuring of the loans to reduce homeowners' principal balances and selling the loans to new investors. [paragraph] Eminent domain typically involves a government "taking" of real property, such as homes or land, for urban renewal projects or highway construction. While it can and has been used to take intangible property, the notion of taking performing mortgages held in securitized trusts is innovative, to say the least. [paragraph] But Richmond means business. The city's momentum has grabbed the attention of Standard & Poor's (S&P), New York, which, it's worth noting, recently amped up its warning about the use of eminent domain because of Richmond's effort.
S&P "considered the likelihood of implementation remote" in its October 2012 RatingsDirecto report. But in August of this year, RatingsDirect stated, "Recent developments suggest that the possibility of such eminent-domain proceedings has increased, although only in a few jurisdictions."
It also was in August that the city became embroiled in lawsuits against some of the biggest banks over eminent domain. And they, too, voiced concern in their court filings that the city has taken big strides toward the use of eminent domain.
Richmond describes itself in court filings as a diverse, working-class city hit harder by the housing crisis than most cities nationwide. Median sales prices for homes there dropped from a peak of $450,000 in January 2006 to currently about $220,000.
A bit more than half of homeowners are underwater on their mortgages and the average homeowner in that situation owes about 45 percent more than the home's value. For PLS trust loans that include ZIP codes from the city, 67 percent are underwater.
In the last three years, foreclosures have numbered about 2,000--roughly 16 percent of homeowners. The city's research indicates that a high percentage of underwater mortgages, especially those in PLS trusts, also will face foreclosure. That percentage was not disclosed in court filings.
According to arguments made in the city's court filings, the number of underwater mortgages depresses property values, which in turn reduces property tax revenues--and that means city service cutbacks. Between 2007 and 2012, property tax revenues dropped by more than 14.5 percent. City staffers number 786, down from 950 in 2009.
Richmond maintains it opted to target its eminent-domain effort on the most "risky and toxic loans" originated during the housing boom and included in PLS trusts, "which have exacerbated the crisis because they are especially likely to end...