By now, we shouldn't be surprised by any story involving the Richmond City Council. Whether it's a highly unpopular ballot measure for a one-cent-per-ounce soda tax, a council member sued for flagrant property code violations, or a call for police to restore calm at an unruly meeting, controversy surrounds Richmond's governing body like no other in the East Bay.
But all the fun and fireworks pale in comparison to its current plan to use eminent domain to seize underwater mortgages and provide cheaper loans for homeowners through a third-party lender. Current mortgage holders would be forced to release claims on selected properties for a "fair value" determined by the city -- say, 80 percent of market price -- and new loans would be offered by Mortgage Resolution Partners.
You can see why folks who prefer smaller monthly mortgage payments might like this deal. It greatly reduces the debt they're obliged to pay. But what of the obvious hairball in this soup? If the city can whimsically seize and discount mortgages through eminent domain, why would any lender again fund another home purchase in Richmond?
That this approach seems to distort the definition of eminent domain -- the government's right to take private property for public use -- is another tiny concern. Allowing a select group of borrowers to skip out on their debts wouldn't seem to be a "public use" benefit to the greater community.
Plus, MRP isn't offering its services because of its fondness for Richmond. It's doing so because there's money to be made. CalWatchdog.com, a nonprofit journalism venture in Sacramento, explains how it works:
"A home with a $300,000 mortgage is now only worth $200,000 in the open market. The mortgage reseller (MRP) would buy that $200,000 loan for, say, $160,000 based on a 20 percent discount of the value of the real estate. A new loan for $190,000 would be offered the homeowner. The mortgage reseller would make a $30,000 profit."
For now, Richmond has targeted 624 mortgages. But there are another 4,000 or so over-mortgaged homes in the city. Who knows how much further this practice will spread?
Then, there's another consideration that's barely been mentioned in what Mayor Gayle McLaughlin has positioned as a crusade against predatory lenders.
Individual banks typically do not hold these mortgages. They more often are held as mortgage-backed securities in the secondary market -- retirement plans, 401(k)s and pension funds such as CalPERS -- which would absorb the losses resulting from the loan seizures. So Richmond's actions wouldn't punish banks so much as they'd punish individuals and pensioners.
This idea is so brilliantly outlandish it could only originate in Richmond, the first city in the nation to use eminent domain as a weapon against lenders.
Oh, one other thing, as reported by Alejandro Lazo of the Los Angeles Times on Aug. 13: The feds are uneasy about this plan. The newspaper quoted a letter by Elliot Mincberg, an assistant secretary at the Department of Housing and Urban Development: "Pending legal developments and possible further execution of the plans in question, HUD does not know whether any new mortgage which might be created would qualify for insurance by the Federal Housing Administration."
Otherwise, it sounds like a heckuva plan.
Contact Tom Barnidge at firstname.lastname@example.org.