Calif. city looks to seize loans to ease mortgages

SAN FRANCISCO — When the mayor of Richmond, Calif., and a gaggle of activists and homeowners showed up at the Wells Fargo Bank headquarters in downtown San Francisco this month, they were on a mission to speak with the bank’s chief executive.

They wanted the bank to drop a lawsuit aimed at stopping Richmond’s first-in-the-nation plan to use the government’s constitutional power of eminent domain to “seize” hundreds of mortgages from Wells Fargo and other financial institutions.

As Mayor Gayle McLaughlin and the plan’s backers approached the bank building, security guards locked the doors. After a bank official told her there would be no meeting then and that someone would call her later, she grabbed a bullhorn.

“I am absolutely not backing down,” McLaughlin said, as curious tourists and lunching office workers milled about.

Wells Fargo, three other banks and even the Federal Housing Finance Agency think otherwise.

The banks have filed two lawsuits alleging that the plan is an illegal abuse of eminent domain, which allows governments to seize private property for public use — like a house in the path of a new highway or a piece of land needed for a new park.

The banks argue the plan would “severely disrupt the United States mortgage industry” because many other cities would likely adopt the same program to help homeowners who owe more on their mortgages than their houses are worth.

So far, Richmond has sent out more than 600 offers, but has not yet begun any eminent domain proceedings. Newark, N.J., North Las Vegas, Nev., El Monte, Calif., and Seattle are considering similar plans, according to Wells Fargo’s lawsuit.

While the housing industry is recovering slowly, Richmond, a city of roughly 100,000 people, is in the middle of a housing crisis, as plummeting home values and rising crime has left many worried that an era of urban blight is upon them.

McLaughlin said cities are considering the program because they are desperate. Nearly half the mortgages in Richmond, for example, are “underwater,” the owner owes more than the house is worth.

The plan is the brainchild of Cornell University law school professor Robert Hockett and here’s how it works:

“The fact of the matter is that underwater loans do default at massive rates,” Hockett said. “Underwater loans are a major drag on the economic recovery. We have got to do something.”

Richmond, working with San Francisco-based Mortgage Resolution Partners, offers $150,000 to buy a $300,000 bank loan on a house that is now worth $200,000 and is in danger of foreclosure.

If the bank agrees, the city and the company then obtain the loan at $150,000. Richmond and the company then offer the homeowner a new loan of $190,000, which, if accepted, lowers the monthly payments and improves the owners’ chances of staying.

In such transactions, the company receives $4,500 for each completed sale and splits any additional profits with the city.

If the bank refuses to sell the loan to Richmond, then the city invokes its power of imminent domain and seizes the mortgage. It would then offer the bank a fair market value for the home.

Mortgage Resolution Partners, the company partnering with the city, puts up the money and had promised to pay all Richmond’s legal costs. City officials have not said how many homes they hope to refinance through eminent domain.

McLaughlin is a Green Party candidate who beat back opposition from the city’s police and fire unions to win a second term in 2010.

She said she fears homeowners will begin to abandon their homes, leading to blighted neighborhoods and the draining of public coffers to the point of municipal bankruptcy experienced by Stockton, Calif., and Detroit.

“The city is stepping in where Wall Street and where the federal government have been unable or unwilling to do so,” she said.

Federal regulators said eminent domain isn’t the answer. The Federal Housing Finance Agency said plans to seize loans “present a clear threat to the safe and sound operations Fannie Mae, Freddie Mac and the Federal Home Loan Banks.”

Tim Cameron, a Washington, D.C., lobbyist with the Securities Industry and Financial Markets Association, said there is more at play than a single person’s underwater loan.

Cameron said pension funds, banks and other groups that made loans in Richmond stand to lose millions if the city is allowed to use eminent domain to force lenders into accepting less than the original terms of the loan.

He also predicted that cities using eminent domain will make lenders wary of doing business there.

“There’s a domino effect in play here,” he said.

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