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The city of Richmond, California, announced an unconventional plan to ward off foreclosures among underwater homeowners, instantly sparking debate and criticism throughout the mortgage industry. In fact, several industry groups have called into question the constitutionality of the plan and have voiced concerns for its long-term consequences.
[IMAGE]""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,"" Richmond ""Mayor Gayle McLaughlin"":http://www.ci.richmond.ca.us/index.aspx?NID=55 told the ""San Francisco Chronicle"":http://www.sfgate.com/realestate/article/Richmond-s-pioneering-eminent-domain-threat-4695857.php Tuesday.
The plan, which ""is fraught with negative economic consequences for the community,"" according to the ""Association of Mortgage Investors (AMI),"":http://the-ami.org/2013/07/30/ami-condemns-richmond-californias-actions-and-the-use-of-eminent-domain-in-general/ is for the city to obtain the mortgage loans of underwater properties and help homeowners refinance at their homes' current value.
The ""Mortgage Bankers Association (MBA)"":http://mbaa.org/NewsandMedia/PressCenter/85225.htm president and CEO, David H. Stevens, boils the plan down to ""a short-term solution for a few underwater borrowers that will have severe negative long-term costs for every homeowner in the city.""
Richmond will rely on Mortgage Resolution Partners to carry out the refinances.
The city sent 32 banks letters requesting to purchase more than 600 underwater mortgages, according to reports. If the banks do not agree to sell the mortgages, the city plans to seize them under its right to eminent domain.
[COLUMN_BREAK]This use of eminent domain is unprecedented. Generally, eminent domain is employed by cities to obtain land for development projects.
Several industry groups have actually called the plan unconstitutional. ""Both federal and California law clearly show that this scheme is illegal,"" stated the ""American Securitization Forum"":http://www.americansecuritization.com/ Tuesday.
The AMI, along with the MBA and the ""Securities Industry and Financial Markets Association (SIFMA)"":http://www.sifma.org/newsroom/2013/sifma-statement-on-city-of-richmond_s-threats-to-use-eminent-domain/ pointed out that mortgages are tied to pension funds for teachers, firefighters, and other middle-class Americans across the country.
Seizing these loans would not only damage Americans counting on these investments for their retirement, but it would also have a damaging impact on the future of the mortgage market.
""The practical effect of this proposal will be that individual investors, who put their money into pension funds and other investment vehicles, making mortgage money available to homebuyers, will see their assets and savings arbitrarily, and we believe unconstitutionally, taken,"" said Judd Gregg, SIFMA CEO and former senator from New Hampshire.
""This will not help expand mortgage credit availability in this country,"" Gregg added.
On its website, the MBA says it ""agrees wholeheartedly with the Federal Housing Finance Agency (FHFA) that 'utilizing eminent domain in this way could undermine and have a chilling effect on the extension of credit.'""
In a public statement released Tuesday, AMI also called into question Mortgage Resolutions Partners' integrity. ""Mortgage Resolution Partners (MRP) is not Robin Hood,"" AMI said.
MRP's ""business model depends on persuading local governments to use the blunt instrument of eminent domain to take money away from the investments of seniors, unions, and others in the mortgage market, give that money to MRP, and, as a result, lower property values across communities as rates on new mortgages go up.""
MRP has undertaken a similar role in North Las Vegas, Nevada, where a ""lawsuit"":http://mortgagebankers.org/files/NVEmDomSuit.pdf is now under way regarding the legality of using eminent domain to seize mortgages.
