All Eyes on Eminent Domain Battle between California City and Mortgage Companies
August 27, 2013
Aug. 27, 2013
Credit unions in the Northwest will want to pay careful attention to a fight that is brewing in the San Francisco working class suburb of Richmond, California.
Earlier this month, the City of Richmond sent letters to mortgage companies seeking to purchase loans on over 600 properties from those mortgage companies. The letters threatened that if the mortgage companies did not sell these particular underwater loans to the city and its partners at less than the value owed to the company, the city would use eminent domain to purchase the property at market value.
The city would get the money to purchase the loan from a group of financiers called Mortgage Resolution Partners (MRP). Once the city had acquired the loan, it would then sell the home back to the homeowner for slightly more than it paid for the loan.
For example, a home with an existing mortgage of $300,000 might now only have a fair market value of $200,000. The city of Richmond and MRP would offer the mortgage company $150,000. If the mortgage company didn’t accept, the City would the go to court to argue that the property is only worth $150,000. If the judge agrees, this is what the City and MRP would pay for the property. The City would then offer the homeowner a new loan for $190,000. MRP would receive a $4,500 fee for each completed sale, and split any additional profits with the city. In the case mentioned above, this could be a return of $22,250 for MRP. Not a bad non-interest income on a $190,000 loan that they would probably securitize and sell on the secondary market.
The eminent domain threat would also apply to subordinate lien holders who are not willing to play ball with the city and the forced cram down.
In a challenge to Richmond’s actions, several mortgage bond trustees, including Wells Fargo, have filed a lawsuit in the federal court in San Francisco. The lawsuit alleges that the proposed use of eminent domain is unconstitutional because it benefits a small group of Richmond citizens at the expense of out-of-state investors, which violates interstate commerce laws.
Also weighing in on the eminent domain fight is the Federal government with the Federal Housing Finance Agency (FHFA) sending a strong message to cities thinking about following the Richmond example. The FHFA commented that plans to seize loans, “present a clear threat to the safe and sound operations of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.” The FHFA added it would direct Fannie Mae and Freddie Mac to limit, restrict, or cease business activity in any town using eminent domain to seize mortgages.
Credit unions should pay careful attention to the outcome of the fight happening in California. Several other municipalities are considering similar plans, including the City of Seattle, according to published reports.
There is one other aspect credit unions will want to keep in mind. If they stopped offering mortgage services in areas where the municipality is using eminent domain to seize mortgages, there could be discrimination consequences. For example, the city of Richmond has a population that is primarily black and Hispanic.
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