Richmond’s Foreclosures Strategy? Eminent Domain!

Richmond, Calif., has a bold strategy to resolve its ongoing housing crisis – eminent domain. Banks in the largely black and Hispanic community of Richmond, California, have dragged their feet in restructuring the roughly 100,000 underwater mortgages that plague the city.  As a result, the city wrote to 32 lenders offering to buy 624 homes at prices close to current market value, but far less than the outstanding loans, which would force the lenders to write off the balance as a loss.

The city is threatening to invoke eminent domain in order to take possession of the loans and the homes if the banks don’t accept the city’s offer or work with the city to negotiate a mutually acceptable counter-offer.  Once the city has bought the homes it plans to restructure the mortgages in a way that would allow the present occupants to stay in them.

Loans will be reset to a price close to current market value, with the payments being reduced accordingly, which will give homeowners a small amount of equity in the property and thus allow them the means and the incentive to stay current on the loan moving forward.

Banks Fighting Eminent Domain to Prevent Foreclosures

Both the banking and real estate industry are vigorously fighting the use of eminent domain to force mortgage resolution. Industry spokespeople feel the government has no right to interfere in private borrower and lender transactions and are lobbying the cities involved. They are threatening to raise interest rates for any city that allows eminent domain to be used in this manner.

Both sides are making valid points. Free use of eminent domain would in effect give borrowers a “get out of jail free” card that could encourage unhealthy speculation, additionally shifting the economics for lenders and raise the cost of credit.

But the alternative and current situation is bad for communities, bad for borrowers, and even bad for many lenders.

Eminent domain can be used as a powerful tool to level the playing field between borrowers and lenders. In the current situation it’s almost impossible for a homeowner to gain any leverage in negotiating with a lender, while the lender has vast legal resources. Both lenders and borrowers have strong incentives to negotiate and if a city or other entity can step in it can make for a more fair and productive negotiation process.