TOPICS > Economy

Calif. City Contemplates Using Eminent Domain to Solve Its Foreclosure Crisis

September 19, 2013 at 12:00 AM EST
Half of all homeowners in Richmond, Calif., owe more on their property than what it is worth, prompting the city to consider using the power of eminent domain to seize underwater mortgages and help residents stay in their houses. But detractors say that move will hurt the city by alienating Wall Street. Hari Sreenivasan reports.
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GWEN IFILL: Next: a second story about government officials pushing back against banks and other lenders, this one focused on the aftermath of the mortgage meltdown.

In Northern California, a town is on the verge of taking unprecedented action to help underwater homeowners. Will other cities follow suit?

Hari Sreenivasan has our report.

HARI SREENIVASAN: Jazz musician Morris LeGrande spends a lot of time jamming in the small recording studio in the back of his Richmond, California, home. He and his wife Luajuana, both 57, were first-time homeowners when they bought their place in 2004 for $310,000.

Several years later, when the property was appraised at nearly half-a-million dollars, they refinanced and used the money to do some home repairs.

LUAJUANA LEGRANDE, homeowner: This was on sale, actually.

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HARI SREENIVASAN: But the LeGrandes’ dream of paying off their home one day was shattered in 2007, when the housing bubble burst, and like so many families across America, they found themselves underwater on their mortgage, owing more than their home was worth, much more.

MORRIS LEGRANDE, homeowner: We’re currently $270,000 underwater. It weighs on me heavily. I have had some sleep issues over the years.

LUAJUANA LEGRANDE: You only get what you absolutely need. Every now and again, you can splurge and get ice cream.

HARI SREENIVASAN: Their street has been hit hard, too.

MORRIS LEGRANDE: This white house down, that home was lost to foreclosure and resold. This green house here, that was lost twice.

HARI SREENIVASAN: The couple is current on their mortgage payments, due to help they receive from the federal government’s Home Affordable Modification Program, which cut their ballooning monthly payments nearly in half, but they say foreclosure is a very real possibility unless they can reduce the amount they owe.

MORRIS LEGRANDE: I don’t see staying here, pouring any more money into this house, knowing that in the end I’m going to have to say, here you go, you can have it back.

HARI SREENIVASAN: But the LeGrandes and other families in Richmond who are on the brink of foreclosure say they now have hope of keeping their homes, thanks to this woman.

GAYLE MCLAUGHLIN, mayor of Richmond, Calif.: They say, no, we can’t. We say, yes, we can.

(APPLAUSE)

HARI SREENIVASAN: Richmond Mayor Gayle McLaughlin, a former teacher and member of the Green Party, is on a crusade to stop foreclosures she says have devastated her working-class, predominantly minority community.

Despite rising home prices in many areas of the country, half of all Richmond homes are currently underwater, and nearly 20 percent of homeowners have gone through foreclosure.

 

GAYLE MCLAUGHLIN: When we have these vacant, blighted homes, you know that they’re really attractors of crime. They really lower the overall value of property for the entire neighborhood.

HARI SREENIVASAN: McLaughlin has put forward a controversial and novel plan, using eminent domain to seize underwater mortgages from Wall Street firms and investors, in hopes of keeping residents in their homes.

Eminent domain is usually invoked by governments to take private property for big projects like railways, which are designed to serve the public good. But Richmond is on the verge of being the first city in the nation to instead use the power to help refinance homes. Richmond’s city manager took the first steps in July, sending letters to financial institutions that manage the mortgages of 624 underwater homes, including the LeGrandes’, offering to buy the loan at what the city considers current fair market value.

That’s considerably less money than what is owed on the mortgages. If the offers from the city are refused, McLaughlin says the city may invoke eminent domain, seizing the loans, and then working with owners to try to refinance their homes at today’s lower price, restoring some equity to the homeowner.

So far, not a single financial institution has accepted the city’s offer.

GAYLE MCLAUGHLIN: We have moved forward with this option to utilize eminent domain as a last resort, because no solution to this housing crisis has been brought forward by either the banks or the federal government.

HARI SREENIVASAN: It is an unprecedented approach which has garnered national media attention and has sparked a huge debate among Richmond’s residents.

MAN: They didn’t complain when they got the house. And now that they have made a bad call, they are looking to you to bail them out for another handout.

HARI SREENIVASAN: At a contentious city council meeting last week, McLaughlin sparred with two of the council members opposed to the eminent domain plan. Passionate residents on both sides of the issue lined up to speak into the wee hours of the morning.

MAN: If we don’t cancel this program, then it is going to be impossible to get credit here in the city of Richmond. And, believe me, there’s not going to be a job created in this city. There’s not going to be a house improved.

WOMAN: My home was valued at 420, and now it’s 125. If this program doesn’t pass, we move.

HARI SREENIVASAN: Vice Mayor Corky Booze, who is strongly against the eminent domain plan, said the city could face serious legal consequences if it moves forward.

CORKY BOOZE, vice mayor of Richmond, Calif.: We are the guinea pig. Is 110,000 people worth fighting Wall Street?

AUDIENCE: Yes!

(SHOUTING)

CORKY BOOZE: That’s fine, but when we have a multimillion-dollar suit and your tax dollar has to pay it, I hope you are still there hollering and saying, yes, yes, I want to pay that bill.

HARI SREENIVASAN: Local real estate agent Jeffrey Wright is also opposed to the use of eminent domain. He is part of a campaign funded by the California Association of Realtors to stop the plan. Wright says lending institutions have no legal obligation to negotiate with homeowners, and he fears they will no longer want to do business in Richmond.

JEFFREY WRIGHT, real estate agent: If a lender wants to renegotiate, that’s between the lender and the borrower. It’s not for a municipality such as the city of Richmond to become an interloper into someone else’s agreement, utilizing strong-arm tactics such as eminent domain to force them to have to renegotiate an agreement.

HARI SREENIVASAN: Wright also believes homeowners, many of whom claim predatory lending forced them into bad mortgages, bear the burden of responsibility, not the banks.

JEFFREY WRIGHT: In my 34 years of the real estate business, at no point in time have I ever seen anyone strapped to a chair, burned with cigarettes, pistol-whipped, forced to sign a loan agreement.

HARI SREENIVASAN: While emotions are running high in Richmond, there’s an even bigger battle under way between the city, supporters of the city’s plan, and Wall Street.

STEVEN GLUCKSTERN, Mortgage Resolution Partners: Do I believe that Wall Street is circling the wagons in any way they can? Of course they are. They don’t — for whatever reason, they don’t like this.

HARI SREENIVASAN: Steven Gluckstern is the chairman of the San Francisco private investment firm Mortgage Resolution Partners, MRP. He is the one who proposed the eminent domain plan to Richmond leaders, and he’s now working closely with the city to implement it.

And here’s an important point to understand: Gluckstern and the city didn’t just randomly pick 624 mortgages to buy. They went after homes with a very specific, complicated loan, known as private label securitized mortgages. Now, these are mortgages which have been sold from the original lending institution, bundled together with other loans in trusts, and then sold to private investors. They are traded daily, so hundreds, possibly thousands of individuals have a financial stake in them.

Gluckstern says, unlike a traditional loan directly between a bank and a borrower, the complicated structure of PLS mortgages makes it very difficult for Richmond homeowners and homeowners around the country to know who they can actually negotiate with to reduce their loan.

STEVEN GLUCKSTERN: There’s about four-and-a-half million private label securitization mortgages, half of which are underwater, half of which we know are going to default. That’s two-and-a-half million American families. This is a hairball stuck in America’s economy right now, and it’s got to get hacked up.

HARI SREENIVASAN: But one of the most controversial aspects of the city’s plan is that Gluckstern’s company, its investors, and the city of Richmond stand to make money if the eminent domain plan moves forward.

Here’s how their plan works. In a hypothetical example, if a home was originally purchased for $400,000 and is now worth $200,000, the city would use eminent domain to seize the loan for $160,000. That’s 80 percent of the current fair market home value.

The city would then help qualified homeowners to refinance, reducing their monthly payments, and giving them $10,000 back in equity. That leaves $30,000 to be divided between the city of Richmond, MRP, and its investors.

SCOTT SIMON, former managing director, PIMCO: That’s called stealing.

HARI SREENIVASAN: Scott Simon is a former managing director of PIMCO, one of the world’s largest bond funds which invests in mortgage and asset-backed securities. Simon says MRP and Richmond are taking profits away from average Americans.

SCOTT SIMON: The lenders, the investors, its really the same thing in this case, are in a large part your viewers. It’s their 401(k)s. It’s pension plans. It’s firemen, and policemen, and teachers. It’s exactly backwards of the way MRP makes it sound, which is that rich people are — you know, Wall Street is trying to make money.

HARI SREENIVASAN: And Simon says as the city’s move could have very real consequences for all residents of Richmond, even those not underwater on their mortgages.

SCOTT SIMON: Why would you ever lend money in an area where the government could just say, we’re going to take it? A place like Richmond will be cut off. Fannie and Freddie Ginnie Mae will all walk away. The big lenders will all walk away. And you want to see something terrible happen? Wait until you can’t get a mortgage in Richmond.

GAYLE MCLAUGHLIN: The fact is that you cannot restrict credit to a community. The fact that mortgages would be boycotted or any kind of — that’s an illegal type of action.

HARI SREENIVASAN: Still, Richmond may already be seeing blowback from Wall Street. Last month, the city was unable to sell its highly rated municipal bonds in the open market. And a coalition of mortgages bondholders, which are being represented by trustees Wells Fargo, Deutsche Bank, and the Bank of New York Mellon, have been challenging the city and MRP in federal court.

Mayor McLaughlin and a group of supporters gathered outside Wells Fargo last month and demanded the bank and other lending institutions stop their legal actions and work with the city.

GAYLE MCLAUGHLIN: This is building to be a national movement. There are many cities like Richmond that and are suffering big time.

HARI SREENIVASAN: At the end of their seven-hour meeting last week, the Richmond City Council voted 4-3 to move forward with the eminent domain plan. But city leaders, including Mayor McLaughlin, say they are still hopeful they can work out some kind of agreement with the banks and bondholders using eminent domain only as a last resort.

GWEN IFILL: A postscript: Earlier this week, a federal judge in San Francisco dismissed the investors’ lawsuit against Richmond and MRP, saying the case had been filed prematurely. But he didn’t rule on the merits of the case.