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September 20, 2013

City OKs Radical Plan to Keep Families in Their Homes


California homeowners were among the hardest hit in the nation in the 2007 housing crash. But in Richmond, Calif., where roughly half of homeowners are underwater on their mortgages, meaning they owe the bank more on their house than the house is worth, the city government is trying something new to keep families in their homes.

Richmond Mayor Gayle McLaughlin has proposed using eminent domain to seize underwater mortgages from Wall Street, then help qualified homeowners lower their monthly payments in a last-resort effort to keep residents in their homes.

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“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,” said McLaughlin.

Eminent domain is a power the government has to take private property in order to build large projects that serve the public good, like highways or railways. If the plan goes through, Richmond will be the first city to use it to help refinance homes.

However, the plan has many passionate critics. Scott Simon of the bond fund PIMCO says that the eminent domain plan could discourage banks from investing in Richmond in the future.

“Why would you ever lend money in an area where the government could just say, we’re going to take it?” he said. “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.”

Warm up questions
  1. What role do local governments play in the everyday lives of the people of the community?
  2. What does eminent domain mean and how is it typically used?
    • Answer: A right of a government to take private property for public use by virtue of the superior dominion of the sovereign power over all lands within its jurisdiction (Source: http://www.merriam-webster.com)
  3. What does it mean for a homeowner to be “underwater” on their mortgages?
    • A home purchase loan with a higher balance than the free-market value of the home. This situation prevents the homeowner from selling the home unless s/he has cash to pay the loss out of pocket. It also prevents the homeowner from refinancing in most cases. Thus, if the homeowner wants to sell the home because s/he can’t afford the mortgage payments anymore, perhaps because of a job loss, the home will fall into foreclosure unless the borrower is able to renegotiate the loan (Source: http://www.investopedia.com/)
Discussion questions
  1. What are the risks and benefits to Mayor McLaughlin’s plan to use eminent domain to help homeowners who are underwater their mortgages?
  2. Is it fair to homeowners who aren’t underwater that the government is choosing to help homeowners who are? Why or why not?
  3. Describe how you think the affected homeowners and banks would respond to this plan?
  4. Is there a better solution to help homeowners? What would it be?
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