A bare majority of the City Council approved a plan for the city to buy about 620 mortgages that are underwater—regardless of whether payments on the loan are current. If the mortgage holders refuse to sell, then the city will consider using eminent domain to seize the mortgages.
The city's goal is to buy a $400,000 mortgage for the current value of the property—say $200,000, and then help the owners refinance a loan for $190,000 and then use the firm, Mortgage Resolution Partners, to resell the paper. Homeowners would immediately have a bit of equity and likely have a lower interest rate because underwater mortgages are very difficult to refinance.
Of course, the mortgage holders would take a huge hair cut of questionable legality.
Unfortunately, the U.S. Supreme Court opened the door government overreach like this when justices ruled in a 5-4 case (Kelo vs. the city of New London) that the city could condemn private property using eminent domain for redevelopment—not just public improvements like roads, schools that it had been the traditional uses.
Richmond's embrace of the concept, which Mortgage Resolution Partners has been shopping around the country in areas hit hard by the housing bubble popping, takes eminent domain into dangerous new areas. The city's politics are every bit as progressive as those in Oakland or Berkeley so expanding government reach and authority fits with the mindset of its leaders.
David Stark, public affairs director for the Bay East Association of Realtors, said "I think the Richmond City Council needs to be aware of the unfortunate, unintended consequences of the decision. The same banks that can make homeownership possible for people who want to put down roots in their community could look at Richmond as a potential liability and decide not to make loans there.
"That will make it harder for people to purchase homes in Richmond and not make it a better community."
Notably, Richmond is pursuing this policy as home prices have rebounded sharply, up 29 percent year-over-year, according to the Zillow index. Back in 2009, it was at $270,000 and fell to about $155,000 in 2011 before climbing back to $217,000 last month. The trend is positive and, if the city is patient, the market will continue to right itself. Government intervention likely will have the opposite effect.
Another note: Despite the political dustup, Richmond continues to market itself. The San Francisco Business Times contained a 24-page insert from Richmond touting the city as a great place to do business as well as visit. Missing was any comment on the city's soaring crime rate and neighborhoods that are best avoided. Nationally, 93 percent of cities are safer than Richmond. Would you want to take your business there?
