In a bizarre interpretation of State eminent domain law, a California Bay-Area city is considering the power of eminent domain to rescue more than 600 homeowners from delinquent mortgages.
The city would accomplish this new brand of government-subsidized housing by seizing the properties from secondary lenders, many of whom have cheaply bought off the underwater mortgages from major banks resigned to offload the original homeowners’ loans at a loss. The city would then pay the secondary lenders “a fair market value” and resell the homes back to their original occupants at current market prices, which in 2013 are far below the homes’ market values at the time of their pre-housing-bubble financing and construction.
Among the many things that aren’t clear is whether the “fair market value” the city intends to pay the lenders directly corresponds to the current market price the city would charge (with interest, no doubt) the delinquent occupants to remain in their homes.
If the plan is successful, Richmond, a city long controlled by a succession of Democratic mayors and council members, would become the first municipality in the United States to use the power of eminent domain in such fashion. But other cities are expressing interest in the idea.
Nearly half of Richmond’s home mortgages are underwater. Many of the houses are now valued at less than half what their owners, who financed their homes at the height of California’s easy-lending housing craze, are having to pay.
The eminent domain move has infuriated banks and secondary lenders, with many industry advocates warning that no bank on Earth would re-enter the housing market in a city with leaders willing to pull the trigger and force lenders to take a financial hit on properties whose owners stopped paying.