A San Francisco Bay Area city is moving ahead with its first-in-the-nation plan to use the government's constitutional power of eminent domain to seize hundreds of underwater mortgages.
The Richmond City Council voted 4-3 early Wednesday to set up a Joint Powers Authority to bring more cities into the plan. Mayor Gayle McLaughlin says the city of El Monte in Southern California has expressed interest, and she believes other cities will follow.
Under the plan, Richmond would use eminent domain to seize the underwater mortgages. It would then offer the bank fair market value for it and give the homeowner a new loan that would lower monthly payments and improve the owner's chances of staying.
Banks have filed lawsuits to stop Richmond from going ahead.
Richmond can now invoke eminent domain if trusts for more than 620 delinquent and performing "underwater" mortgages reject offers made by the city to buy the loans at deep discount pegged to their properties' current appraised prices to refinance them and reduce their principal.
A mortgage is under water when its unpaid balance is greater than its property's market value.
City council members opposed to the plan said that using eminent domain would put Richmond at risk of expensive lawsuits that could destroy the city's finances.
"A 1 percent chance of bankruptcy from this program is a deal-breaker for me," Councilman Jim Rogers told a crowd of about 300 people at the meeting, moved to a city auditorium from the council's chamber.
Other council members warned of a backlash from financial institutions, noting Richmond had no takers last month when the successor to its redevelopment agency put $34 million of bonds up for sale to refinance previous debt. The eminent domain plan had been disclosed to the U.S. municipal bond market.
While housing advocates urged support for the plan, realtor Jeffrey Wright warned that going through with eminent domain could prompt a clampdown in mortgage lending in Richmond or push up mortgage interest rates in the city of about 104,000 residents.
Responding to the plan, the Federal Housing Finance Agency recently said it would press Fannie Mae and Freddie Mac to limit or cease its business where such proposals get approved, effectively closing off most mortgage financing there.