The mechanism? Eminent domain, the power of the government to seize private property for public use, which has not typically been used to help poor neighborhoods. After five years of the federal government gently nudging banks to forgive homeowners debt they took on in better days, cities have found a legal weapon the financial industry truly fears.
The stability of those housing markets, and the banks that profit from it, could depend on the fallout.
The strategy’s complexity has left stakeholders to lean on dogfight rhetoric: From the community activists, “Save homes, stop foreclosures.” And the Realtors, “Stop investor greed.” And the lawyers for the investors, “Prevent this unconstitutional investment scheme.”
In short, here’s how it would work: Richmond condemns mortgages on homes that are now worth far less than what the borrower owes. The note holders — investors such as pension funds and mutual funds — are forced to settle for the current fair market value. The city pays for this with cash from a new set of investors, who now own the mortgage. The new price is set by the current market, and the borrower settles into a more manageable loan.
It’s that smashing of the bond between lender and debtor that animates investors. They’ve acted aggressively to stop it, lobbying the mayor and council members directly. Wells Fargo and Deutsche Bank, on behalf of scores of investment funds, sued to stop the plan. The securities industry points out that the plan would also hurt pensioners who own pieces of Richmond’s mortgages. Indeed, last week, California Public Employees’ Retirement System — the safety net for some Richmond workers — joined the suit.
Richmond couldn’t get insurance to shield it from a crushing judgment — if it lost its bid to spare struggling homeowners, the city could find itself underwater.
In the backlash to the plan, the market boycotted the city’s most recent bond issuance, forcing it to withdraw the $34 million offer, which was supposed to refinance earlier debt.
Richmond’s leaders stared hard at the threats. In the end, it seemed to only harden their resolve.
“They sold everybody a dream, and said ‘you have to own a home, or you’re not American,’ ” said Council member Joel Myrick, explaining to an auditorium packed with yellow T-shirts (those for seizing the mortgages) and red (those against it) why he voted in favor of using eminent domain. “I am not willing to allow people to be dependent on the generosity of these same banks that are suing us in order to be able to pay off their loan before they die.”