Sunday, August 4, 2013

Richmond, CA: A Landmark Clash between Wall Street and Main Street

Last week, the City of Richmond, CA, in an effort to deal with 624 homes with “underwater” mortgages, notified loan service providers and trustees that the city wants to 1) buy the homes at today’s depressed value and,2) if needed, pursue an eminent domain legal strategy to stop home foreclosures. While eminent domain is generally used by governments to force homeowners to sell their property in order to pursue new developments such as highways, railroads and parks, Richmond could become the first U.S. city to apply this approach for the benefit of homeowners.
  • Richmond Mayor Gayle McLaughlin said her residents "have been suffering for years thanks to the housing crisis Wall Street created and which Wall Street refuses to fix."
  • David Stevens, President/CEO of the Mortgage Bankers Association said, “The program is a short-term solution for a few underwater borrowers that will have severe negative long-term costs for every homeowner in the city….the program is ill-advised and likely unconstitutional and will add to Richmond’s problems rather than solve them.”
NOTE: the broader issue is how a positive outcome for Richmond would affect the +$13 trillion U.S. mortgage market.

Background on Richmond, CA and its legal strategy: 1) about half of the city’s homeowners are “underwater”, 2) it is located on the San Francisco Bay, 3) its unemployment rate is 17%, 4) its 106,500 residents are mostly black or Hispanic and 5) the city’s largest employer is Chevron Corp. with 1,900 workers. Richmond legal strategy is based on the U.S. Supreme Court Ruling in 2005, Kelo v. City of New London (Connecticut), which said the city could seize private property if its future use would have a positive economic impact on the community. The city of New London wanted to condemn Kelo’s land and give it the Pfizer Corporation, which would build a research and development facility as part of an economic development project. Note: ironically, Kelo’s home was condemned, but the research facility was never built.

MY TAKE

While Richmond and its supporters hope their strategy will favor David rather than Goliath, some loan providers and investors are concerned that if this strategy gains momentum, it could have a negative impact on the U.S. mortgage and housing markets. As both Wall Street and Main Street watch Richmond’s efforts, other cities are considering similar eminent domain action.  Because of the potential impact on investors, homeowners and government entities, Richmond’s process will likely encounter several legal and legislative challenges..

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