Morris LeGrande believes that, sooner or later, the bank's going to come for his house. The 57-year-old jazz musician lives in the largely African-American Park Plaza neighborhood of Richmond, Calif., and owes more than $400,000 on his mortgage. According to a recent assessment, his house is only worth about $130,000. LeGrande is current on his payments, but in 22 years he will have to make a single lump-sum payment of $194,000.
"At the end of the day, we will lose this home," LeGrande says. "There's no doubt about it."
LeGrande has become a de facto spokesman for underwater homeowners in a city where more than 40 percent of all mortgages are underwater, according to Zillow.
Richmond, a city of about 100,000 people (where the largest employer is a local Chevron refinery that made national headlines last year for a massive fire leading thousands of residents to sue for damages) is contemplating using an unlikely tool to rescue homeowners and help keep them in their homes: the power of eminent domain.
The city has become ground zero in a standoff between housing advocates and big banks, which argue that the unprecedented scheme could unsettle the market for complex mortgage-backed securities.
Richmond's eminent domain plan seeks to stabilize its local economy by preventing foreclosures from taking place.
If the plan succeeds, it could set off a chain reaction among cities big and small. And it could transform eminent domain—a power that has long been used to displace residents, often in communities of color—into a tool to help stabilize neighborhoods.
Here's what has happened so far: In July, city officials sent letters to 32 mortgage companies offering to purchase more than 600 underwater mortgages for about 80 percent of their market value. (80 percent, the plan's proponents say, because some loans are at risk of default, though banks have countered that the markdown is merely a moneymaking scheme since the principal amounts will be adjusted to their full market value). Once the city obtains the loans, it will help homeowners refinance at more affordable rates. If the banks refuse to sell, Richmond is threatening to use eminent domain to seize the mortgages.
The contagion of foreclosure
The idea of using eminent domain to this end is widely attributed to Cornell University law professor Robert Hockett. Under the plan, Richmond would use its power to seize the mortgages, write down the principal to its fair market value, and refinance them at more affordable rates through government programs.
Eminent domain is a power that cities have traditionally used to force people from their homes to make way for large public works, like highways and stadiums.
“[It] has become what the founding fathers sought to prevent: a tool that takes from the poor and the politically weak to give to the rich and politically powerful,” writes Dr. Mindy Fullilove, a professor of clinical psychiatry at Columbia University, in the conclusion to her 2007 Institute for Justice report, "Eminent Domain and African Americans."
Foreclosures have a "contagion effect" on neighborhoods. They significantly drive down the property values of nearby, non-distressed homes because of deferred maintenance, neglect, and vacancy.
Drawing on a decades-long history of seizure, Fullilove notes that from 1949-1973, more than 2,500 projects in 992 cities were carried out through eminent domain—displacing a million people. Two-thirds of them were African-American.
“What the government takes from people is not a home, with a small ‘h’, but Home in the largest sense of the word: a place in the world, a community, neighbors and services, a social and cultural milieu, an economic anchor that provides security during the ups and downs of life, a commons that sustains the group by offering shared goods and services,” Fullilove writes.
Remarkably, Richmond is looking to become the first city to use eminent domain to keep people in their homes—and in their "Home," economically anchored.
LeGrande, who is African-American, says that Richmond's initiative is " a use of eminent domain where for once we don't get the short end of the stick."
If LeGrande were to lose his home to foreclosure, he wouldn't be the only one affected. Richmond Mayor Gayle McLaughlin says that foreclosures have a "contagion effect" on neighborhoods. They significantly drive down the property values of nearby, non-distressed homes because of deferred maintenance, neglect, and vacancy. According to one recent study, each foreclosure can also cost local governments upwards of $19,000 in lost property taxes, court fees, and in some cases, demolition costs.
Richmond's eminent domain plan seeks to stabilize its local economy by preventing foreclosures from taking place. According to a recent estimate by the Department of Housing and Urban Development, enabling underwater homeowners to refinance and preventing foreclosure can provide more than $37,000 in combined economic benefits to the homeowner, neighbors, local government, and lenders.
Mortgage Resolution Partners, a San Francisco-based investment firm, is partnering with the city in an advisory role. If the plan moves forward, the firm will search for funders who can lend the city enough money to buy the loans from their current owners. And for each mortgage that is acquired and refinanced through the program, MRP will earn a flat fee of $4,500.
There are billions of dollars in state and federal programs that are available to help homeowners restructure their loans, says John Vlahoplus, MRP's chief strategy officer. Once they obtain the loans, MRP and Richmond plan to refinance them through those government programs.
The loans Richmond made offers on aren't just any underwater mortgages. They're private-label securities, which have been pooled with other mortgages to back bonds. The trustees of these private-label securities have said that they can't sell or modify them, and that's exactly why Richmond officials targeted them: because homeowners with these complex loans are unable to get loan adjustments.
The aim is to prevent foreclosures, but big banks argue that the novel use of eminent domain could quickly destabilize the market for mortgage-backed securities because it would destroy the relationship between lender and debtor. Investor losses from the Richmond program alone could exceed $200 million, the banks have said. And if the plan succeeds in Richmond, it could open the floodgates to similar initiatives around the country.
Locally, the loudest critics of the program have come from real estate professionals. The Western Contra Costa Association of Realtors has blanketed the city with flyers warning that the scheme will drive down property values and make it harder for people to sell their homes.
At a public forum attended by several dozen Richmond residents in September, local realtor Jeff Wright said Wall Street investors stood to benefit from the plan, but that local homeowners would suffer. (Wright earned jeers at the forum by defending the banks' role in the mortgage crisis, offering loans to buyers who could not really afford them. "You can’t blame the banks for having a product and selling it," he said.)
In August, Wells Fargo and Deutsche Bank filed a lawsuit to prevent the plan from going forward.
"If Richmond is allowed to proceed, other local governments would likely follow suit, with the result that losses across residential mortgage backed securities trusts and their investors would exceed billions of dollars," said Rocky Tsai, an attorney for the banks, in a court filing.
Though critics of the program have framed it as a risky venture that could cripple Richmond's real estate market, to McLaughlin, the riskiest thing would be to do nothing at all.
A federal judge isn't buying the banks' argument, though—not yet, at least. In mid-September, U.S. District Judge Charles Breyer dismissed the lawsuit, ruling that the banks can’t sue the city for something it hasn’t done yet.
So far, the only thing Richmond officials have done is send out letters to 32 banks and mortgage companies offering to buy the mortgages. The banks have responded that they don't have the authority to sell the loans. "If [the banks] have the authority to sue the city, it certainly sounds like they have the authority to sell the loan," Richmond Mayor Gayle McLaughlin said.
Richmond City Manager Bill Lindsay says he still hopes that the banks will be willing to sell the loans. "We are still hopeful that we can implement the program without ever using eminent domain through negotiation with the lenders," Lindsay said on Monday. But if the banks refuse to sell and the city does invoke eminent domain, it can expect more litigation.
A domino effect of foreclosure resistance
Other towns and cities battered by the mortgage crisis have taken note and are waiting to see what happens. If the Richmond plan succeeds, others will likely copy it. The Seattle City Council recently hired Hockett to study that city's foreclosure problem, and he suggested that Seattle also use eminent domain to keep people in their homes. And just across the bay from Richmond, San Francisco Supervisor David Campos recently revealed plans to propose similar measures to the County Board of Supervisors.
Though critics of the program have framed it as a risky venture that could cripple Richmond's real estate market, to McLaughlin, the riskiest thing would be to do nothing at all. Because of the impact that each foreclosure has on surrounding home values, she says the plan isn't just to help the owners of the 624 mortgages the city made offers on—it's to prevent entire neighborhoods from slipping into decline.
"It becomes a domino effect for the whole neighborhood," McLaughlin says. "The city's goal is to prevent harm to all of us, as neighbors and residents of Richmond."
Meanwhile, LeGrande and Richmond's other underwater homeowners are waiting to see what happens. Since he anticipates he will eventually lose his home, he questions the wisdom of holding on to his mortgage at all.
"This has placed us in a position where if it doesn't happen, then we will more than likely leave this city, because this is like placing money down a hole," LeGrande says.