California city to bail out underwater mortgages

Richmond plans to buy negative-equity loans and help owners refinance. The drastic action it vows to take if lenders don't play along is somewhat less comforting.

By Jason Notte Sep 12, 2013 9:48AM
Image: Mortgage due (© Hemera Technologies/Jupiterimages/Jupiterimages)Is it in a city's interest to do everything in its power to prevent its citizens' "underwater" mortgages from becoming foreclosures and urban blight? Even if that action ticks off the federal government and a whole lot of investors?

The Richmond, Calif., City Council is willing to take that chance. According to Reuters, the council voted 4 to 3 in favor of Mayor Gayle McLaughlin's proposal for city staffers to work with investor group Mortgage Resolution Partners to acquire mortgages with negative equity and allow residents to keep their homes.

Richmond can now invoke eminent domain if the institutions and investors holding 620 underwater mortgages reject offers made by the city to buy the loans at a deep discount, refinance them and reduce their principal. The Green Party-affiliated, Wall Street-distrusting mayor and housing advocates love the idea.

Folks with business in the housing sector are far less enamored. Realtor Jeffrey Wright warned that the plan could result in tougher mortgage lending in Richmond or push up mortgage interest rates there. The Federal Housing Finance Agency recently said it will advise Fannie Mae and Freddie Mac to limit or cease its business where similar proposals are approved.

The mortgage industry and local real estate businesses have defeated such plans in North Las Vegas, Nev., and earlier this year in San Bernardino County in Southern California, but they were steamrolled in Richmond. That's not sitting well with the investors holding the mortgages, who allege that the city would use eminent domain power to assist San Francisco-based MRP and split the profits from refinancing.

The investors have sued through Wells Fargo & Co (WFM) and Deutsche Bank (DB) in U.S. District Court to block the plan, which they say relies on their taking a loss. The court date is scheduled for Thursday.

Just remember all of this the next time you hear discussion about ballooning home prices, rising mortgage rates and a foreclosure rate approaching "normal." Younger buyers are still largely shut out of the housing market because of massive student loan debt. States including Florida and California are still dotted with abandoned homes. Richmond's eminent domain plan is still in the extreme margins and facing a huge court fight, but its approval states emphatically just how dire the housing situation remains in pockets of the U.S.

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Sep 12, 2013 10:38AM
I guess property ownership rights mean nothing to the administrators of this town.  If they do this, good luck ever getting mortgages approved to buy a house in this town ever again.
Sep 12, 2013 12:32PM
Why invest or be responsible anymore? First Government and Union owned car companies and now this. When will people pay for their own mistakes?
Sep 12, 2013 11:50AM
The libs will never fail to amaze me with the dumb ways they will use government power or spend taxpayer money.
Sep 12, 2013 10:03AM
Insane, of course, but this is Ca. and soon the USA if the losers keep whining and voting.
Sep 12, 2013 10:09AM
Absolutely the dumbest idea yet! If you want to HELP, tear the jobs blockade down any way you can and get your city's citizens making family-sustaining wages again. What "import" are you known for? Reverse that and throw the business platform SCUM out! If somebody asks- "What is your city known for..." and you can't immediately answer it with a product (not service) that gets shipped elsewhere so cash comes IN... then you and your city are FAILURES. V_L... veteran LENDER. I've done all kinds of lending in all kinds of markets and conditions over several decades... keep fooling with values and the criteria that compromises Risk and Service and you just keep digging a deeper hole. Good people pay their debts. They do so because they faithfully go to work, do work, and expect to be paid. Destroy all these administrative pariah, paper and button pushing morons and restore the American Work Ethic with Fair Pay, Representation and "Talent" that knows more about enterprise than financial tyranny. You will regret your move, Richmond, CA...
Sep 12, 2013 1:13PM
Clearly, the courts need to put the kibosh on Richmond's plans without delay. This is grand theft, plain and simple. 
Sep 12, 2013 12:53PM
Glad I don't live there. What a terrible idea that will be found to be illegal when challenged in court.
Sep 12, 2013 2:11PM
Before everyone starts bashing the banks, don't forget that lots of folks used their homes as ATMs. Borrowing on the equity when times were good to buy cars, boats, second homes, vacations, remodels, etc...They figured that home prices only increase so there was no risk to borrowing. The banks should not be faulted when these homeowners find themselves seriously underwater. Society should not bail out these people. The moral hazard is significant. 
Sep 12, 2013 1:26PM
Sep 12, 2013 1:40PM

So, the answer is to ultimately make the taxpayer responsible for this? 

Sep 12, 2013 3:34PM
They are trashing their R.E. market for sure!  Richmond, CA, like it or not, is making things more than a little difficult for any other property owner there seeking to sell his home.  Who will finance the purchase?  No sane banker or mortgage banker would touch it.  Law suits will abound as well.
These administrators aren't liberal, they are downright ignorant.

Sep 12, 2013 3:05PM
Banks do not even own the mortgages.  US taxpayers own most, and guarantee the rest under FHA, VA, and Fannie/Freddie.
Sep 12, 2013 1:36PM
while it's a dangerous precedent... i totally understand the citys point of view...   you are dealing with institutions that would rather screw the city and the people in the houses for a bottom line profit...  this is america after all and profits come above all else.  the city is simply trying to stave off the inevitable foreclosure and expenses to the city to force the banks to negotiate...   anyone that has gone through this process with the banking industry understands what i mean....  there is a reason EVERY states attorney general sued the major banks in this country... and the 26 BILLION dollar settlement that ensued...  i certainly have mixed emotions about this move...   i can't stand the banks but don't think any government should force a business to accept their will....
Sep 12, 2013 2:34PM
Its Richmond, a place where u dont move in you get the hell out. The Golden State more like tarnished tin foil
Sep 12, 2013 9:38PM
Sep 12, 2013 3:09PM
Home values in Richmond(CA) are soaring and will continue to go up.  This is just a waste of time and more money for lawyers.

So what is the local gov. putting into the mix? If it's money, then it's taxpayers who should get to VOTE on this.

The entire country should vote on major moves. Let's see how obamacare would go then. How would the possible war in Syria go then?

Sep 12, 2013 1:34PM
Hmm, sounds like mortage resolution partners is taking the driver seat from Fannie/Freddie here.   F&F have relief refi programs but they have limits and rules, which these houses probably don't qualify for.  So these people have to sit on a high loan amount WITH a high interest rate. 

They should be able to change the interest rate but not the loan amount. But it is impossible to qualify for a lower rate when your state was the epicenter of raising home prices during the crisis.  Everybody else could refi when rates got to a record low and this town got the shaft.  Dunno why/how people can blame the borrowers here, its not a omg you should be able to pay for it thing.  Its more like, give these people a chance to refinance at a lower rate like every body else issue.

Sep 12, 2013 2:40PM

A gesture that will fail ultimately but will force lenders to reconsider "reckless" paper.


If we had stricter lending regulations, we would not be at this point.


Time (albeit late) to set (reset?) precedence.

Sep 13, 2013 1:59AM
Maybe California needs to re-visit the idea of a state-owned bank like North Dakota has.
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