Emily Badger is a former staff writer at CityLab. Her work has previously appeared in Pacific Standard, GOOD, The Christian Science Monitor, and The New York Times. She lives in the Washington, D.C. area.
One town tries a radical plan to rescue its underwater homeowners.
Very early Wednesday morning, the city council in Richmond, California, narrowly voted to move forward with a plan to aid underwater homeowners. It's a plan so controversial that everyone from Wall Street investment banks, to the National Association of Realtors, to U.S. congressmen, to state politicians, to the Federal Housing Finance Agency has weighed in.
Five years into the housing crisis, the city of about 105,000 and its Green Party mayor figure they've run out of better options – and out of patience with federal solutions that never came – to ease the local foreclosure glut. The median price of homes in town has dropped to less than half of what it was at the height of the housing boom. And the city has estimated that about 51 percent of its homeowners are underwater. Richmond is in worse shape than most towns sacked by the housing bubble: Its home values are low, its unemployment and poverty rates are high, and its residents in danger of foreclosure are unlikely to have the principal on their mortgages reduced any time soon.
In this position, Richmond has now become the only municipality in the country to seriously consider using eminent domain to seize underwater mortgages from the investors who currently hold them. The city would not seize the properties themselves – as more typically happens in eminent domain cases – but would use the power to essentially purchase the mortgages at their current market value (against the wishes of the banks that hold them).
A company called Mortgage Resolution Partners would help the city fund and manage the purchases, ultimately selling the restructured mortgages to new investors at rates that would keep the current residents in their homes.
The scheme, Mother Jones wrote earlier this year, "is almost as complicated as the derivatives and collateralized debt obligations that caused this mess to begin with."
But the idea at its core is relatively simple: Richmond sent letters to the banks and investors currently holding 624 mortgage notes on homes in the city, asking to buy them at current market value. The banks said no. Now the city hopes to purchase them anyway, citing a government power more commonly wielded to take private property for constructing public infrastructure like highways.
Mortgage Resolution Partners has been pitching the proposal to distressed cities for more than a year. But, so far, every other local government that's been tempted by the idea has ultimately abandoned it in the face of growing pressure from the banking industry, realtor groups and even the federal government.
Both Mother Jones and Wonkblog have good summaries of where this fight stood on the eve of Tuesday night's city council meeting (which dragged into the early hours of this morning). In short: Banks and the securities industry have threatened that no one will give credit to cities that show they're willing to seize property like this. And the Federal Housing Finance Agency has said it may take legal action against cities that try the tactic and stop lending to would-be homeowners who live there.
The whole proposal is a little hard to wrap your head around because some of the actors appear to be playing for the wrong team. Mortgage Resolution Partners is not a non-profit community group. It's a business run by people who've worked in the banking and real estate worlds. This housing story is not quite David vs. Goliath. It's David and some savvy investors formerly associated with Goliath vs. Goliath.
The angry industries involved have leveraged that plot line to their benefit, casting the eminent domain proposal as something that sounds like a Wall Street (or government, depending on your point of view) land grab, not an attempt to rescue homeowners. A flier distributed in Richmond by a local realtor's association opposed to the idea warns residents "Don't let Wall Street take another bite out of Richmond homes." Legislation proposed last year in Congress that would have stymied the idea was called the Defending American Taxpayers from Abusive Government Takings Act.
As with the housing boom itself, it's easy to see how the local homeowners here might have a hard time sorting out their own best interests. Seemingly everyone has lined up against a plan the mayor believes is best for Richmond's residents. And that plan also passed the city council by a vote of just 4-3.
Then again, just because everyone else has refused to try this doesn't mean it's not a good idea.
Top image: Flickr user BasicGov.