California City Advances Eminent-Domain Plan Despite Opposition

The city of Richmond, Calif., is pushing forward with its plan to rescue underwater homeowners by buying their mortgages, and is leaving open the possibility of using eminent-domain to acquire loans that banks will not sell.

Richmond's city council voted last night to form a group to administer the plan, under which the city would purchase hundreds of underwater mortgages at fair value, reduce their principal, and allow homeowners to stay in their houses. The plan has faced opposition from banks and mortgage investors, which have launched a public-relations campaign against the city. Wells Fargo (WFC) and other banks sued the city last month to block the plan.

More than half of Richmond's homeowners owe more than their properties are worth, according to Mayor Gayle McLaughlin. The mortgage-restructuring plan, called Richmond CARES, has been proposed to several cities by Mortgage Resolution Partners, a San Francisco investment firm that would arrange for the loans to be restructured and sold.

"I've seen the housing crisis devastate Richmond's neighborhoods," McLaughlin said in the news release. "We are determined to work to save our communities, and Richmond CARES can begin to fix what Wall Street broke."

On Monday, a coalition of fair-housing groups asked the courts to reject the banks' efforts to stop the city's plan. Wells Fargo, Deutsche Bank and Bank of New York Mellon (BK) sued the city in federal court in San Francisco, on behalf of institutional bond investors BlackRock, DoubleLine and Pimco, in order to block the scheme. The suit claims that the use of eminent-domain in this case would be an illegal seizure for private use.

In July, the city sent letters to 32 mortgage servicers, asking that they sell 624 mortgages to the city or risk having the properties seized through eminent domain.