Calif. city looks to seize loans to ease mortgages

Associated Press

SAN FRANCISCO

When the mayor of Richmond, Calif., and a gaggle of activists and homeowners showed up at the Wells Fargo Bank headquarters in downtown San Francisco this month, they were on a mission to speak with the bank’s chief executive.

They wanted the bank to drop a lawsuit aimed at stopping Richmond’s first-in-the-nation plan to use the government’s constitutional power of eminent domain to “seize” hundreds of mortgages from Wells Fargo and other financial institutions.

As Mayor Gayle McLaughlin and the plan’s backers approached the bank building, security guards locked the doors. After a bank official told her there’d be no meeting then and that someone would call her later, she grabbed a bullhorn.

“I am absolutely not backing down,” McLaughlin said, as tourists and lunching office workers milled about.

Wells Fargo, three other banks and even the Federal Housing Finance Agency think otherwise.

The banks have filed two lawsuits alleging that the plan is an illegal abuse of eminent domain, which allows governments to seize private property for public use — such as a house in the path of a new highway or a piece of land needed for a new park.

The banks argue the plan would “severely disrupt the United States mortgage industry” because many other cities would likely adopt the same program to help homeowners who owe more on their mortgages than their houses are worth.

So far, Richmond has sent out more than 600 offers, but has not yet begun any eminent-domain proceedings. Newark, N.J.; North Las Vegas, Nev.; El Monte, Calif.; and Seattle are considering similar plans, according to Wells Fargo’s lawsuit.

While the housing industry is recovering slowly, Richmond, a city of roughly 100,000 people, is in the middle of a housing crisis, as plummeting home values and rising crime has left many worried that an era of urban blight is upon them.

McLaughlin said cities are considering the program because they are desperate. Nearly half the mortgages in Richmond, for example, are “underwater,” the owner owes more than the house is worth.

The plan is the brainchild of Cornell University law school professor Robert Hockett, and here’s how it works:

“The fact of the matter is that underwater loans do default at massive rates,” Hockett said. “Underwater loans are a major drag on the economic recovery.”

Richmond, working with San Francisco-based Mortgage Resolution Partners, offers $150,000 to buy a $300,000 bank loan on a house worth $200,000 and is in danger of foreclosure.

If the bank agrees, the city and the company then obtain the loan at $150,000. Richmond and the company then offer the homeowner a new loan of $190,000, which, if accepted, lowers the monthly payments and improves the owners’ chances of staying.

In such transactions, the company receives $4,500 for each completed sale and splits any additional profits with the city.

If the bank refuses to sell the loan to Richmond, then the city invokes its power of eminent domain and seizes the mortgage. It would then offer the bank a fair market value for the home.