A New Foreclosure Solution

The mayor of Richmond, CA is Gayle McLaughlin and she was elected as the Green Party candidate in a working class city of about 103,000 people near San Francisco.  Their housing situation has never recovered from the crash of 2008 and 50% or more of all mortgages in the city are underwater, the mortgage is for far more than the property is worth.  The federal government has been trying to get the banks to renegotiate underwater mortgages nationwide to keep people in their homes, but the programs have been largely ineffective.

Mayor McLaughlin was approached by a company called Mortgage Resolution Partners with a plan to force the banks to resolve the situation by demanding they sell the mortgage for fair market value, with the threat that the city will seize the property under the eminent domain statutes and force them to accept the deal at fair market value.  Then the city will offer the homeowner a reduced mortgage that has a better chance of keeping homeowners in their home. 

The entire financial community is aghast at the prospect, and they have launched a lobbying campaign to stop it.  They have even been joined by Fannie Mae and Freddy Mac, currently operated by the Obama administration.  It seems like all the financial players are opposed to letting the homeowner win, and they are fighting to the death.  They threaten to implement a scorched earth retaliation by refusing to do any mortgage business in the city if this plan is implemented, making it impossible for people to get financing to buy any property there.

She said she fears homeowners will begin to abandon their homes, leading to blighted neighborhoods and the draining of public coffers to the point of municipal bankruptcy experienced by Stockton, Calif., and Detroit.
"The city is stepping in where Wall Street and where the federal government have been unable or unwilling to do so," she said.
Federal regulators said eminent domain isn't the answer. The Federal Housing Finance Agency said plans to seize loans "present a clear threat to the safe and sound operations Fannie Mae, Freddie Mac and the Federal Home Loan Banks."
Tim Cameron, a Washington, D.C., lobbyist with the Securities Industry and Financial Markets Association, said there is more at play than a single person's underwater loan.
Cameron said pension funds, banks and other groups that made loans in Richmond stand to lose millions of dollars if the city is allowed to use eminent domain to force lenders into accepting less than the original terms of the loan.
He also predicted that cities using eminent domain will make lenders wary of doing business there.

The city may have little to lose if Richmond goes the way of Detroit.  I will watch this story.