Banks or bikinis
Wall Street, assailed by terror that its big balloon will be popped when the Fed quits printing money to keep inflating it, lost some hot air this week. Some of the heated blast was expended on the mighty little city of Richmond CA, which some of the lords of finance, insurance and real estate sued for daring to use eminent domain as a way to save people from foreclosure in homes whose mortgages are underwater. What will the federal district court decide about this genuinely social attempt, led by Green Party Mayor Gayle McLaughlin, to have local land-use authority help protect its citizens against the plunderers rather than rolling out the red carpet for them.
One might expect bleets of objection from the local chamber of commerce, but a chamber that helps sponsor the Rosie the Riveter Trust is not like other chambers. And Richmond, which has recently taken on Chevron for a terrible fire a year ago that caused 15,000 residents to seek medical attention, is no shrinking violet when it comes to taking on large, bullying corporations.
It is good to know that while our mayor, burgermeister of a city that has at times experienced the worst per capita foreclosure rate in the nation, expends his public effort on validating the bikini-clad dispensers of coffee across from Golden Valley High, other mayors are doing more substantial work.
Badlands Journal editorial board
'Eminent Domain for the People' Leaves Wall Street Furious
Housing justice advocates hopeful about innovative Richmond plan to use public seizure laws to save underwater homes from foreclosure
- Sarah Lazare, staff writer
Using the authority of state government to actually help people has Wall Street bankers in a panic, spurring threats of aggressive legal retaliation against the town of Richmond, California simply for trying to help some of its struggling homeowners.
'Eminent domain' has long been a dirty term for housing justice advocates who have seen municipalities invoke public seizure laws to displace residents and communities to make way for highways, shopping malls, and other big dollar projects.
But in Richmond, city officials are using eminent domain to force big banks to stop foreclosing on people's homes in an innovative new strategy known as 'Principle Reduction' aimed at addressing California's burgeoning housing crisis.
Richmond became the first California city last week to move forward on a plan that has been floated by other California municipalities to ask big bank lenders to sell underwater mortgage loans at a discount to the city (if the owner consents), and seize those homes through eminent domain if the banks refuse. The city has committed to refinancing these homes for owners at their current value, not what is owed.
City officials launched this process by sending letters in late July to 32 banks and other mortgage owners offering to buy 624 underwater mortgages at the price the homes are worth, not what the owners owe.
"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," Mayor Gayle McLaughlinsaid in late July.
Wall Street is furious at the plan and has vowed to sue the municipality, a threat that did not stop Richmond but did slow other California cities in adopting the strategy.
Big banks have been slammed for their damaging mortgage loan policies that target poor and working class people and communities of color with high risk loans, policies that have had a profound impact on Richmond, which has large latino, African American, and low-income communities.
Eminent domain laws also have a painful history in Richmond, but housing justice advocates are hopeful about this new twist on the seizure law.
"For years we have seen cases where eminent domain was used in a harmful way, and it really hurts low-income communities of color," David Sharples, local director for Contra Costa Alliance of Californians for Community Empowerment, told Common Dreams. "People here in Richmond talk about when they built the big 580 Freeway, and people had their houses taken and were displaced."
"But we see this as a way eminent domain is finally being used to help keep families in their homes," he added. "It is finally a way for it to be used in a good way."
Wall Street Journal
Investor Group Calls Richmond, Calif., Eminent Domain Plan Unconstitutional
Suit Against City Would Block Its Plans to Seize and Buy Mortgages
Banks representing some of the nation's largest bond investors filed suit against the city of Richmond, Calif., on Wednesday to block plans by city officials to seize and buy mortgages using their powers of eminent domain.
The lawsuit, filed in federal court in San Francisco, could serve as a key test for whether a city can move forward with such a strategy, which would allow it to forcibly buy mortgages from investors at a price potentially below the property's current market value. The city would then reduce the loan balance and refinance the mortgage, resulting in a lower mortgage payment for the borrower. The aim is to help struggling homeowners avoid foreclosure.
The legal challenge could serve as a key test for whether cities from Newark, N.J., to Seattle are able to follow Richmond's lead.
The lawsuit was filed by three mortgage-bond trustees, units of Wells Fargo & Co. and Deutsche Bank, DBK.XE +0.52% that were directed to act by a group of investors, including BlackRock Inc., BLK +0.74% Pacific Investment Management Co., as well as Fannie Mae FNMA -3.23% and Freddie Mac, FMCC -1.43% the government-supported mortgage companies.
City leaders in Richmond, a working-class suburb of around 100,000 on the San Francisco Bay, began sending letters last week to mortgage companies seeking to purchase loans on 624 properties and threatening to force sales via eminent domain if investors resisted. The city is teaming up with Mortgage Resolution Partners, a private investment firm based in San Francisco, which was also named a defendant in the lawsuit.
At least four other California cities have signed agreements to work with Mortgage Resolution Partners, but none have taken the step of contacting bondholders about loan sales.
The lawsuit alleges that the proposed use of eminent domain is unconstitutional because it benefits a small group of Richmond citizens at the expense of out-of-state investors, violating the law on interstate commerce. The lawsuit also argues that loans aren't being seized for a valid public purpose—a key criterion for a city that invokes eminent domain.
"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, a partner at Ropes & Gray in New York.
An MRP representative said it was confident its proposal is "entirely within the law." "No investor in any trust will be made worse off by the sale of any loan," said a company spokesman.
Richmond officials said Wednesday they didn't have an immediate response to the lawsuit.
Eminent domain allows a government to acquire property by force that is then reused in a way considered good for the public—new housing or roads. Property owners are entitled to compensation, often determined by a court. Instead of acquiring houses, Richmond would buy the mortgages.
Legal advocates of the eminent-domain plan have said that constitutional challenges aren't likely to hold up in court. The loan strategy wouldn't burden interstate commerce "because it doesn't prevent credit from flowing in any particular way," said Robert Hockett, a Cornell University law professor who advocates for using eminent domain to seize underwater mortgages.
"This is a bluff," said Mr. Hockett. "It's meant to scare city officials into saying, 'Oh, who are we to argue with the big guns.' "
Supporters say their plan would help not only specific homeowners but also the broader community by reducing foreclosures that are hurting property values and eroding the tax base. "It's the responsibility of banks to fix this, and they haven't, so we're taking it into our hands," Richmond Mayor Gayle McLaughlin said in a call with reporters last week.
Of the loans that Richmond wants to buy, more than two-thirds, or 444, are current on their payments. Investors say that seizing loans that are current on their payments from mortgage-bond trusts would significantly degrade the value of those investments. They say if the plan moves ahead lenders will require significant down payments or higher rates in communities where the threat of loan-seizures exists—much the way a sovereign-debt default can raise borrowing costs for a country.
Ms. McLaughlin said threats by banks to raise the costs or change the terms of mortgages to borrowers in her city would amount to "redlining"—a term used for an allegation that banks have at times refused to lend money to certain communities where minorities live.
"It's not redlining," said Scott Simon, who retired in May as a managing director at Pimco. "If you were a lender, would you lend in an area that could literally say, 'Oh, I know you lent someone $100, but we are going to say you only get $50'?"
Investors also say they're worried that the seizures only make economic sense for a city if local officials are able to buy loans at big discounts. "You cannot invest where your money is going to be expropriated—that's a key tenet of investing," said Jonathan Lieberman, head of residential mortgage investing at Angelo Gordon & Co., an investment adviser. The firm is considering whether to join the lawsuit.
The Richmond plan would work like this: for a home with an existing $300,000 mortgage that now has a market value of $150,000, Richmond might argue the loan is worth only $120,000. If a judge agreed, the city's private financiers would fund the seizure of the loan, paying the current loan investors that reduced amount.
Then, they could offer to help the homeowner refinance into a new $145,000, 30-year mortgage backed by a government agency. That would leave $25,000 in profit, minus the origination costs, to be divided between the city, Mortgage Resolution Partners and its investors.
The proposal was set back earlier this year when officials in San Bernardino, Calif., voted against taking up the proposal after several months of hearings. But labor unions and community activists have helped galvanize support in a handful of new cities.