After a marathon hearing that wrapped up in the wee hours of Wednesday morning, the City Council of Richmond, Calif., voted to allow the use of eminent domain to seize underwater mortgages, becoming the first city in the nation to take such a concrete step toward the novel and risky strategy for helping people avoid foreclosure.
The night of impassioned debate -- featuring six feuding council members, a mayor firmly committed to the plan, and several dozen speeches from the public -- showed the power of litigation to sow doubt, and the power of personal stories to stir hearts.
Also on display: The challenge of public participation in a complicated new process that's very hard to understand and very easy to mischaracterize.
"The city is trying to force the people to get into this Wall Street thing," explained Richmond resident Carol Smith, indignantly, when asked to summarize the city's plan. At a rally across from Richmond City Hall, she was wearing one of the lipstick-red T-shirts distributed by the plan's opponents, labeled "STOP INVESTOR GREED." Her daughter Kisha Smith, also wearing the red T-shirt, was equally cynical. "They can put it any way they want, but at the end of the day, the banks are going to get paid," she said. "It looks good right now, because we're desperate, of course we're going to snatch anything out of the air that's tangible."
From those statements, they could just as easily have been sporting the yellow T-shirts distributed by the group backing the plan as they could the red shirts supplied by the Realtors (also suited up in red: A gaggle of college students who declined to answer questions, and left soon after the meeting started). And they weren't the only ones without a clear understanding of how the plan works: The run-down city hall auditorium was full of people talking about it and getting details not quite right.
As the meeting's official business commenced, Richmond's well-respected city manager Bill Lindsay tried his best to explain. He laid out the need for a creative solution, cautioned that he'd try to avoid using eminent domain if alternatives were available, and described the risks. Among them: The bond market is already miffed at the city for trying to stiff the investors who own Richmond's mortgages. When the city went out to issue $34 million in bonds, nobody bought them, forcing the city to withdraw.
"When investors have choices in the market, they tend to choose the safe, plain vanilla option, rather than an option that require them to research and fully understand the story," Lindsay said. "Those bonds are called 'story bonds,' and investors tend to avoid them."
Lindsay says he heard from a few municipal finance experts, including former Goldman Sachs banker Wallace Turbeville, who had earlier defended the plan and wrote a letter saying that any nervousness about eminent domain plan on the part of investors was "baseless" and should fade away. But as long as Richmond is the only city pursuing the option, it becomes much easier for bond-buyers to punish.
"One of the things that's been really difficult is going forward as a single entity," Lindsay told the council. "We're really the only city right now that's on board with the program. That is an an issue also for you to consider, that right now, we are the only one."
And then there's the banks' lawsuit against Richmond, which will get its first hearing tomorrow. To further deepen the Council's worries about forging into unknown territory, Mortgage Resolution Partners -- the firm that's already spent $7 million lining up new investors to take over the loans once they've been taken -- has said that while it will pay for the city's legal defense, it can't buy insurance to cover a large judgment against the city.
The plan's defenders, most prominently Robert Hockett, the Cornell Law professor who designed it, assure the city that it's on rock-solid legal ground and shouldn't fear catastrophic losses. But that's hardly a sure thing. And for those on the Council who remember having to fire a third of the city's workforce after a fiscal crisis in the early 2000s, it's an untenable risk -- especially for the lower-income areas that are disproportionately impacted by a loss of city services.
"We knew the empire was going to strike back. This is no surprise," said Council member Jim Rogers. "And we have to look at the seriousness of their threats. We have to look at the damage they could wreak on is. A 1 percent chance of bankruptcy for this program is a deal breaker for me."
And as the debate continued, it largely turned on the question of whether the city should take that chance, sticking its neck out for cities around the country that might want to explore the option. The two council members staunchly opposed to the plan, Corky Booze and Nat Bates, argued it wasn't worth it.
"We cannot fight with Wall Street and their big money," said Booze. "If we lose in court, I'll be sitting here and say 'I told you so.'"
"We are the guinea pig," agreed Bates. "Is 110,000 people worth fighting Wall Street?"
After the Council laid out its positions, 100 people from the audience lined up to take two-minute turns at the mic. Opposition came from prim Realtors and polished businessmen from the posher areas of town fearing the repercussions of being cut off from credit. But it also came from some smaller retail associations, and plenty of individuals skeptical about a map from the San Francisco Chronicle that showed many of the 624 homes on the city's seizure list aren't in poor neighborhoods, because of a decision to include underwater homeowners who are current on their payments as well as those who are delinquent:
As the hearing crossed into the morning hours, though, more and more proponents of the plan came forward. In a fight that often still comes down to a difference of opinion over whether underwater homeowners should have just taken more personal responsibility for their financial decisions in the first place, stories like Ali Marshall's had an impact. She bought her house 13 years ago, she said, but is $112,000 underwater after Fannie Mae refused to reduce the principal on the loan.
"None of this could've been predicted," she said. "We're paying currently, but any day, we could face foreclosure, because of the financial stress. We love our home. It is our first home. My daughter was born in our home. We want to do the honorable thing, we want to pay our debt. We simply deserve a new loan."
At around one in the morning, the politics of the situation got ugly. Bates and Booze, who are African American, accused white Mayor Gayle McLaughlin's Richmond Progressive Alliance of attempting to speak for the black community, and derided her black allies on the council as being "not African American." As the race-based squabbling escalated, McLaughlin gaveled the session into a recess to cool things off.
In the end, the Council defeated the resolution to kill the eminent domain plan, and approved another one to set up a Joint Powers Authority that could administer it. The city is still a long way from actually exercising its power to seize property. For now, it's decided the safe route of inaction carries greater consequences than the one that's unknown.
"Nothing in life is 100 percent risk-free," McLaughlin said. "But leadership demands that we sometimes take risks on behalf of our community."