The issue of eminent domain law has been widely discussed over the past few weeks, since news of Mayor Gayle McLaughlin proposed a process of seizure through which residents of Richmond, Calif. would receive a break from underwater mortgages. Working with Mortgage Resolution Partners to broker the eminent domain deals, the city of Richmond was attempting to complete the sale of various underwater homes using eminent domain as a way to give private investors a discount and the city could begin refinancing its citizens’ mortgages into brand-new loans, with better rates and values.
Early Wednesday morning, Richmond’s City Council voted 4-3 in favor of Mayor McLaughlin’s proposal, thus allowing the outlined plan to go into effect.
"A one percent chance of bankruptcy from this program is a deal-breaker for me," Councilman Jim Rogers told the crowd gathered at the meeting.
The city of Richmond has already begun to feel the scrutiny of the mortgage and banking industry, with many firms flat-out refusing to take on the $34 million in bonds offered last month as part of the redevelopment deal.
“Our residents have been badly harmed by this housing crisis,” Mayor Gayle McLaughlin reportedly said. “The banks have been unwilling or unable to fix this situation, so the city is stepping in to provide a fix.”
“We cannot fight with Wall Street and their big monies,” said Council member Nathaniel Bates. “Richmond may be a test case where the lending institutions will take this thing to the furthest limit.”
Wells Fargo, along with Deutsche Bank AG (DB) and Bank of New York Mellon Corp. began litigation against the city of Richmond last month, saying that the then-proposed eminent domain plan “violates constitutional protections against impairing private contracts.”
“The use of a municipality’s power of eminent domain to seize mortgage loans raises profound Constitutional and other legal concerns,” said Michelle Korsmo, chief executive officer of the American Land Title Association (ALTA). “It is clear that the recent proposal in Richmond, Calif., and subsequent legal filings are likely the start of a long and drawn out legal process.”
The eminent domain seizure plan, in effect, could threaten the market for private-label mortgage-backed securities, which could result in a “domino effect” of sorts in the mortgage industry, should this eminent domain seizure experiment work in Richmond, where the unemployment rate is slightly higher than the state average, could it lead to a domino effect in other cities plagued by the housing crisis blight?