The city of Richmond, a working-class suburb on the San Francisco Bay in California, has already begun sending out letters to mortgage companies offering to purchase loans. It’s an attempt to reduce loans for homeowners who currently owe more than their property is worth.
If the mortgage companies refuse to sell at a price determined by Richmond, the city is intending to seize these loans through eminent domain. However Freddie Mac is considering whether or not to take legal action to contest these efforts as the feeling is that loans sales would not be voluntary. Apparently it will consider taking action if it has the backing of the federal regulator.
According to the article in the Wall Street Journal, eminent domain is a way of enabling the government to forcibly acquire property that can then be used for the public good. This means it’s usually used where new roads need to be built, or other public amenities such as shopping centers or housing. Property owners are entitled to compensation, and the level is often determined by a court. Richmond and other cities are intending to buy the mortgages from investors at prices below the property’s current value. They then intend to cut the loan principal to approximately 97.75% of the property’s market value before refinancing the loan so it becomes a government-backed mortgage. The loans under consideration are those that were sold to investors as mortgage-backed securities, and these don’t have any government backing.
Apparently city officials in Richmond have identified 624 mortgages that they wish to seize through eminent domain. Out of these 118 are delinquent, while the other 444 are up-to-date with payments. Not surprisingly the plan is backed by the community, but just as unsurprisingly the eminent domain approach is very unpopular with mortgage investors holding these loans. They are concerned that cities will offer prices that are too low, especially for those homes were borrowers are currently up-to-date with their mortgage payments. If this current plan is allowed to go ahead, then it’s likely that investors will require much higher down payments in the future, or would impose higher rates in communities where the threat of seizure is much higher.