Seizing Homes to Solve the Mortgage Meltdown?

How one California city will help big-monied financiers make a bundle by confiscating property.

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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