Seizing Homes to Solve the Mortgage Meltdown?

foreclosure-signOnce again, California is burnishing its reputation as the nation’s premiere location for oppressive government. In a 4-3 vote on September 11, the Richmond City Council approved a measure whereby the city would use the government power of eminent domain to seize hundreds of “underwater” mortgages. After seizing the mortgages, the city would offer the banks what it considers a fair market value for them. In turn, homeowners would be granted a new loan with lower monthly payments aimed at keeping those owners in their houses. Lenders have filed lawsuits to keep the plan from proceeding.

The Council set up a Joint Powers Authority aimed at bringing additional cities into the program, but two that had expressed interest, San Bernadino, CA and North Las Vegas, NV, backed off when they encountered stiff opposition from mortgage lenders and realtors. The first lawsuit against the plan was filed by Wells Fargo, acting as the trustee in the litigation for dozens of investment entities. That case was dismissed by US District Judge Charles Breyer on September 16. In his ruling, Breyer explained the case was about “future events that may never occur,” because the City Council had yet to officially enact their plan. If they do, the suit, along with others, will undoubtedly be re-filed.

The Council held another vote on September 17 in an attempt to continue moving forward. Despite another 4-3 approval, the Council was forced to concede that state law required them to have a super majority 5-2 vote, plus court approval in order to legitimize their efforts. Thus the program known as the Richmond Community Action to Restore Equity and Stability remains in administrative limbo.

Despite the setback, Mayor Gayle McLaughlin and the Council continue to argue that the city needs to use eminent domain to seize 624 mortgages they contend are in danger of foreclosure, insisting that such foreclosures would adversely affect remaining property values and threaten neighborhood stability. When they began implementing their efforts in late July, the city attempted to buy the mortgages at steep discounts, and they threatened lenders with eminent domain seizures if they refused to sell by August 14. “After years of waiting for a comprehensive fix, we’re stepping into the void with a local principal reduction program,” said Mayor McLaughlin at the time. Stepping in with a Soprano-like shakedown is a more accurate assessment.

The seizure plan was the brainchild of Mortgage Resolution Partners (MRP), a private firm who continues to aid Richmond in this blatant abuse of power. MRP plans to raise the money the city needs to buy the mortgages, and recruit buyers for the mortgages the city seizes. If they manage pull it off, Richmond will profit from each sale they make, and MRP will garner a $4,500 fee for each mortgage it helps refinance.

According to the Credit Union Times, the troubled mortgages being targeted were for properties in “working class and lower class neighborhoods.” Yet CNN Money reveals that Richmond “has targeted mortgages with balances averaging $370,000″ and some are “much pricier than that,” including homes bought for over a million dollars.

MRP chairman Steven Gluckstern contends the city is being forced to consider eminent domain because previous offers to buy the mortgages–at the aforementioned discounts–were rejected by the lenders. “If we could do this without going through this contentious process, we would,” he said. In other words, give us what we want, at a price we want–or we’ll try to take it anyway.

The lenders’ side of this story is clear. First and foremost, they consider any seizure made under the dubious auspices of eminent domain unconstitutional. They also debunk some of the city’s claims. In court documents, lenders revealed that Richmond was targeting performing mortgages and homeowners who were not in imminent danger of default. Lenders also explained that if homeowners do default, they are willing to help them with loan modifications, as they have already done in the past.

Another inconvenient reality for Richmond and MRP is the fact that home values in the city rose 20 percent last year with a similar rise projected for this year. In other words, the market is correcting itself without government interference.

Diana Dykstra, president and CEO of the California Credit Union League (CCUL) put this entire effort in the proper perspective. “Housing prices go up, housing prices go down,” she said. “Now every time there is a market correction should a homeowner be able to run to their elected officials to get their loan principal reduced?”

The Federal Housing Finance Agency (FHFA) wants no part of these pernicious efforts. The agency, which regulates mortgage giants Fannie Mae and Freddie Mac, announced in August that it would instruct those entities to “limit, restrict or cease business activities” in any jurisdiction using eminent domain to seize mortgages. At the time, Fannie Mae Chief Executive Timothy J. Mayopoulos noted that invoking eminent domain to seize mortgages “has the potential to unsettle investors in mortgage securities.”

There is more than a little irony attached to that statement. Richmond, like countless cities across the nation were victims of the housing meltdown that was amply aided and abetted by the Democrat-controlled Fannie Mae and Freddie Mac. Both lenders played a giant role in that crisis when they authorized increasingly flexible criteria for loan-making and then purchased the resulting loans. The flexible criteria were engendered by another Democrat creation, the Community Reinvestment Act of 1977 that essentially turned owning a home into an affirmative action program, forcing banks to make questionable loans to minorities under the auspices of eliminating racial discrimination in lending. When it all blew up in 2008, the American taxpayer bailed out Fannie and Freddie to the tune of $187 billion.

Pushing the premise that the bailout was a good idea, CNNMoney contends that taxpayers may soon see a profit on that “investment.” Yet as the LA Times reveals, Fannie and Freddie have been avoiding potential long-term losses amounting to billions of dollars by delaying the implementation of new accounting methods. Those methods would require them to write off a larger number of non-performing mortgages. They have been allowed to delay the implementation of those accounting methods until 2015–by the FHFA.

Like the taxpayer bailout of Fannie and Freddie, the attempt to implement eminent domain in Richmond, CA is another testament to the dubious machinations of government officials more than willing to kick the rule of law to the curb if it interferes with their aspirations, and those of their well-connected friends. Even now, Richmond is attempting to partner with other cities that are also exploring the idea of seizing that which does not belong to them, in a manner that bears a striking similarity to the practices of a Third World totalitarian autocracy.

One of the primary reasons America has prospered while much of the Southern Hemisphere has struggled–despite being settled by the same groups of people–is due to the reverence for private property this country has enjoyed for more than two centuries. If that right is threatened, America will indeed be “fundamentally transformed.” Fatally and irreparable transformed.

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  • James S.

    Can’t really believe that the home prices in richmond have gone up when that place is a shithole.

    • bluffcreek1967

      The City of Richmond has been a shithole for many years due to their dominant black demographics. Blacks love to turn their own communities into toilet bowls.

      • American1969

        I have to agree with you! And no, you are not racist for saying so! All you have to do is look. Black neighborhoods look like garbage, or some Third World dump: Broken windows, graffiti everywhere, trash everywhere, bars on all of the windows, trashy, nasty people wandering the neighborhoods. Then they have the nerve to complain that they live in a dump!
        And I know about Richmond because I lived there for a period of time when I was a kid, and it was a dump then! I’ve been through there since then, too, and it’s still a dumpy, trashy place.

  • ziggy zoggy

    Worse than a shithole. Think of Barstow combined with Tijuana.

    • defcon 4

      A crime ridden hellhole, but a lot of California cities are becoming more like it every day.

  • Aizino Smith

    This is just more intervention in what is not and has not been a free market for a long time.

    Since Jesse Jackson and other evil people got involved forcing lending standards on banks. The banks should have originated the loan, taken the origination fee and passed it on the Fannie Mae or Freddie Mac. then the government could take the blame for the 100% of the mess.They deserve the blame because they have so many leftists in their ranks and supine RINOs.

    Redlining? I can deal with it. Put the loan application in a database and replace names with numbers like how database software assign keys. Look at the income, credit history and so forth. Any competent database administrator and programmer could take color out of such decisions using programming code.

    Instead we get excrement, the CRA.
    Between CRA, securitization of mortgages and president leaning on Fed chairmen, and political parties spending out the @ss, we do not have a free market. So big players do not have risk, they socialize risk, while taking the profit.

    • objectivefactsmatter

      Um, yeah. We taxpayers accept the risk when we allow these turds to take office.

  • defcon 4

    MRP, a private company, is going to gain from a civil authority’s use of eminent domain. Is that a conflict of interest? I had thought eminent domain wasn’t normally used in for-profit ventures.

    • objectivefactsmatter

      It’s OK. The government is running things. They’ll fix it.

    • American1969

      More crony capitalism.

  • WHYLIBERALSHATE

    Another example of liberals hate everyone no matter what color they are….

    • bluffcreek1967

      Yeah, but they especially hate the white color.

  • objectivefactsmatter

    “In a 4-3 vote on September 11, the Richmond City Council approved a measure whereby the city would use the government power of eminent domain to seize hundreds of “underwater” mortgages. After seizing the mortgages, the city would offer the banks what it considers a fair market value for them.”

    Can’t those stoopid banks understand the risks they took by loaning to people who can’t pay? Nobody forced them to do that!!!

    Greedy banks. Good thing our heroes from the government are here to fix things for us.

    • American1969

      Yes, banks were forced to grant mortgages to people who couldn’t afford them. It was called the Community Reinvestment Act.

      • Aizino Smith

        Leftists argue that mortgages under the CRA actually have a lower default rate. I have seen analyses both ways. Lately though the Krugmans of the world have not been pushing that line.Either because it is nit true of because the other side has not been pushing the CRA angle so hard.

  • AJ

    So far this hasn’t happened in Texas to my knowledge. They’re one of the few states who still have strict regulations to adhere to.I used https://www.capstarlending.com for my mortgage and was very pleased… However, the rest of the nation is not in as good of shape as texas