Last week, issues of eminent domain popping up in the California city of Richmond made headlines, as a private investment firm called Mortgage Resolution Partners began working with the local government to seize property in an effort to purchase bonds for low cost and proceed with inflated loan sales.
"Mortgage Resolution Partners has led the city of Richmond into an unprecedented use of eminent domain seizure that is unconstitutional, harmful to homeowners and taxpayers, and unfair to millions of individual savers and investors," said John Ertman at the time, to the Wall Street Journal.
Richmond’s Mayor, Gayle McLaughlin, along with several supporters from the city and reps from Mortgage Resolution Partners, stormed the Wells Fargo HQ in San Francisco on Thursday, demanding that the bank drop its lawsuit preventing the eminent domain seizure. Should the banks refuse to sell the underwater loans in their Richmond portfolio, the city can, in effect, seize the loans under the protection of eminent domain, resulting in the homeowner being reimbursed at what is often cited as “fair market value.” The government of Richmond would then take the eminent domain-seized properties and resell the loans at a lower value to the original homeowner a current mortgage market rates.
The main issue here is the potential dissolution of the secondary market, wherein banks, as entities, would lose the return on investment for the loans issued by smaller entities. While there are immediate benefits to those who are seeing their monthly payments reduced, the effects could potentially be long-lasting and negative, as outlined by USA Today:
►Far from benefiting low-income people as intended, the plan will actually harm them. Much of the money to condemn the mortgages and pay litigation expenses will come from taxpayers, including the poor. Most of the poor are renters, not homeowners, so they cannot benefit from this program. But renters do indirectly pay property taxes through the property taxes paid by their landlords, a cost which is built into their rent.
►The program would also enrich those who took dangerous risks at the expense of the prudent. It isn't good policy to force more prudent taxpayers to subsidize the behavior of people who took the risk of purchasing high-priced real estate in the midst of a bubble. Doing so will predictably encourage dubious risk-taking in the future.
►Prudent Richmonders will also lose out from this policy in another way. If lenders believe that the city is likely to condemn mortgages whenever real estate prices fall significantly, they will either be unwilling to lend to future home purchasers in Richmond, or only do so at higher interest rates. That will hurt the local economy and make it more difficult for Richmonders to buy homes.
What initially seems like a great idea, reducing monthly payments, could result in increased borrowing costs, over time. The inability to buy homes at the cost of lenders not releasing funds to potential homeowners would have a devastating impact on the local economy.
"Wells Fargo representatives routinely meet with local elected officials, and have met with Mayor McLaughlin in the past regarding community concerns," Wells Fargo said in a statement to the LA Times. "Representatives are open to doing so again in the future."