The City of Richmond, California, a working class town of 100,000 located in the east San Francisco Bay, has recently announced that it plans to move forward with a proposal of forcibly purchasing distressed mortgages using its power of eminent domain. Richmond is working with the San Francisco “community advisory firm,” Mortgage Resolution Partners, to purchase loans involving 624 properties.
Basically, the City intends to purchase the loans at a “discounted price” and will then refinance them through the tax-payer backed Federal Housing Administration. Next, the loans will be repackaged into a new security and sold to other private investors. Lastly, the homeowners whose mortgages were purchased will receive a free principal reduction and their monthly mortgage payments will be lowered. But what about the lender and constitutional protections?
Eminent Domain for “Public Use”
The Fifth Amendment of the Constitution states that eminent domain must be used for “public use.” Public use in this context usually comes in the form of a public road or obvious public project. So, how can the City of Richmond claim that they are condemning mortgages for a proper public use, especially considering that the City will benefit financially from each taking?
Richmond is claiming that by allowing the homeowners to refinance their loans, they will be reducing the number of foreclosures, thereby revitalizing the neighborhoods hindered by the housing bust. In other words, Richmond is trying to equate a “public benefit” with the constitutional requirement of public use. Most likely, they are looking to the Supreme Court’s effort to expand the definition of public use through the majority opinion from Kelo vs. City of New London. Richmond’s ideology seems flawed and it is important to note that of the 624 mortgages in question, 444 are current on their payments.
A significant gap in the City’s reasoning, besides the Fifth Amendment concerns, relates to compensation. When considering the fair market value of the loans, which is a vital aspect of any constitutional eminent domain proceeding, what might the damages be to the investment pool that owns the package of mortgages? The assets of the mortgage pool are being reduced or possibly replaced with lower rate mortgages and decreased asset values. The Constitution requires payment of just compensation to the owner, so the lost value is very likely an element of damage that will have to be paid.
Valuing the Mortgage Loans
If a mortgage loan is seized and that loan is current on its payments, the value of the pool of loans will be decreased for investment purposes. Experts are betting that the Richmond will offer prices below fair market value, even on loans where borrowers are current on payments. That does not address the issue of compensation owed to the holder of the asset pool.
In order for an eminent domain proceeding to be deemed constitutional, the condemning authority must pay the property owner, or in this case the holder of the pool of mortgage loans, “just compensation.” Determining an amount of fair compensation between the condemnor and the owner is often at the forefront of every condemnation lawsuit, and every aspect of the condemned property is evaluated with extreme precision. It remains to be seen whether Richmond or Mortgage Resolution Partners can designate an acceptable formula to establish just compensation in the seizing of loans.
Breaking Down a “Transaction”
According to an article by the Wall Street Journal, Richmond’s proposed plan would break down as follows for one loan seizure:
A home with an existing $300,000 mortgage has a current market value of $150,000. Richmond might argue that the actual market value of the loan is $120,000. If a judge agrees, the City’s private financiers will fund the loan’s seizure and will pay the current loan investors the discounted amount. The next step will be refinancing the homeowner’s mortgage to a $145,000, 30-year government-backed loan. At the conclusion, a $25,000 profit, minus any original costs, will be split amongst Richmond, Mortgage Resolution Partners, and its investors.
What happens next?
A lawsuit has been filed against the city of Richmond and Mortgage Resolution Partners by multiple mortgage-bond trustees, including Fannie Mae and Freddie Mac, alleging that the city’s proposal to use eminent domain in seizing mortgage loans is unconstitutional. (Wells Fargo Bank, National Association, et. al v. City of Richmond, California, et al (Case No. 13-03663)).
More to come.
If you received notice that your property is being condemned in Arizona, the eminent domain attorneys at JacksonWhite would love to fight for your right to just compensation in court. Call us today to schedule a consultation with experienced JacksonWhite condemnation lawyer, Anthony Misseldine at 480-464-1111.