RICHMOND -- Ignoring warnings that the move is illegal and will dry up credit for homebuyers, city leaders and a private investment firm on Tuesday announced they have sent letters threatening to use eminent domain to seize 624 underwater mortgages if lenders don't agree to sell them the loans by Aug. 14.

Richmond is the first city in the nation to make such a threat, but other cities are exploring using eminent domain to ¿help distressed homeowners stay in their homes and stem the foreclosure crisis, according to Amy Schur, campaign director for the Alliance of Californians for Community Empowerment, or ACCE.

"Richmond may be out in front, but they are very much not alone," Schur said.

Richmond wants to take control of mortgages where the loan amount exceeds the value of the home and work with the investment firm to refinance them under terms the homeowners can afford.

This week, formal purchase offers were mailed to 32 servicers and trustees holding 624 underwater loans.

Of those, 180 are currently behind on payments, said Graham Williams of Mortgage Resolution Partners, or MRP, the private equity firm that has partnered with the city on the principal-reduction plan. This group represents a first batch of underwater loans, and MRP and city officials say they intend to expand the program after some initial successes.


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City Manager Bill Lindsay, who signed the letter, said the hope is that lenders look at the "whole portfolio" of the city's proposal and opt to take a loss on loans that carry high risk of foreclosure.

"We hope the fact that we're making offers on some delinquent mortgages will reduce the likelihood that (lenders) contest this in court," Lindsay said.

The city is offering to buy the loans at what it considers "fair market value," minus about 20 percent for risk of default, costs of the averted foreclosure, and to generate the profits for MRP, which is financing the purchases. The city pays nothing, said Mayor Gayle McLaughlin, and MRP has also agreed to take on any legal challenges.

McLaughlin said recent upticks in housing values don't eliminate the need to take an unprecedented approach.

"The housing crisis is still ongoing in the city of Richmond," McLaughlin said.

The recent surge in home values has been less pronounced in Richmond, where 47 percent of mortgages remain underwater, according to a report from ACCE. Richmond is the only city in Contra Costa County where total assessed value declined last year. City leaders believe wiping out millions in housing debt, reducing monthly payments, and keeping residents in their homes will stimulate the local economy.

All of the targeted loans are called private label securities, bundled and sold to private investors. Such loans tend to be the most unfavorable for borrowers and have high default rates, said MRP Chairman Steven Gluckstern. The 444 loans that are currently being paid by homeowners still have a high risk of future default because of adjustable interest rates and balloon payments, McLaughlin said.

What happens in Richmond is being watched closely by Wall Street and the banking industry. Industry groups and banking industry advocates say the plan is an unconstitutional use of eminent domain, and will draw a flurry of lawsuits and freeze lending in any city that tries it.

A local real estate broker crashed a noon news conference at City Hall, telling a gaggle of news cameras that the plan is "fraught with peril" and will stifle lending in Richmond while making MRP rich.

Timothy Cameron, managing director of the Securities Industry and Financial Markets Association, which represents hundreds of securities firms and banks, said Lindsay's hopes that lenders will just hand over mortgages at a loss are unrealistic.

"Selling for less than their value is not an option" for the mortgage holders, Cameron said. "It violates their fiduciary responsibility to their investors."

Cameron said lending rates will rise in Richmond and anywhere else that goes ahead with this approach.

"There are costs to exposing capital to a municipality that is willing to take money from private investors," Cameron said.

Earlier efforts to contract with MRP and begin seizing mortgages were thwarted in Salinas and San Bernardino County.

But in Richmond, the progressive-dominated council appears solidly behind MRP and impervious to Wall Street's admonitions. McLaughlin said that if lenders don't accept the city's offers, eminent domain court proceedings could begin in September.

"We have been really given threats by the Wall Street lobbyists, but we're just not going to back down," McLaughlin said.

Contact Robert Rogers at 510-262-2726 or rrogers@bayareanewsgroup.com. Follow him at Twitter.com/roberthrogers.