Will Californian Cities use Eminent Domain to Seize Loans?

Cities in the Golden State are once again testing a controversial mortgage relief plan that could use local eminent domain powers to help residents stung by the last housing crisis.
Now the idea is gaining traction again with the city of Richmond, Calif., last week becoming the first to press forward. The Bay Area city announced that it had asked the holders of more than 620 underwater mortgages — on which the borrower owes more than the home is worth — to sell the loans to the city at a discount. The city would then write down the debt and refinance the loans for amounts in line with current home values.

If lenders refuse, the city could use eminent domain powers to force the transaction, a move widely expected to bring lawsuits from the financial industry.

El Monte is considering using eminent domain to seize underwater mortgages after Richmond launched its effort. Meanwhile, the financial industry is gearing up for a fight with Freddie Mac saying it may sue over these plans.

Freddie Mac General Counsel William McDavid questioned not only the use of eminent domain to purchase troubled loans but the notion that the holders of the loans would be selling them voluntarily. Freddie Mac has warned that the city of Richmond best prepare for legal warfare if it proceeds with its plan to use eminent domain.

California became the center of the national debate over the idea last year when San Bernardino County and two of its cities, Ontario and Fontana, toyed with adopting the strategy. But the Inland Empire communities ultimately shelved the plan, marketed by San Francisco firm Mortgage Resolution Partners, after Wall Street groups voiced strong opposition and little public support materialized.

As real estate professionals what do you think about distressed cities trying to help out their residential home owners through eminent domain? Please share your thoughts with us?

To find out more about these proposals read the full story here:

  • Mary H

    I think there have been law suits files against the city of Richmond now.

  • At the top of the market people were screaming at me, “How can I not
    take advantage of these low interest rates!” Now I watch them live in
    their homes for years, in many cases, with no payments. Be forgiven by
    the bank for hundreds of thousands of dollars and when Xmas is over and
    they have to move they not only don’t have to pay taxes on those amazing
    gains. But are often given “cash for keys” by the bank and or buyers
    for $5000 at least, to $40,000+..
    I do feel bad for people that paid too much for their home. Sometimes just a bad decision. But what causes them to think somebody should bail them out? (I hope the
    losers in Vegas or Wall Street don’t pick up on this!!!)

    When these people buy their next home, if they make a profit on that sale, will they be
    sending part to the bank for their part in the deal just like when they lost?? Any bets;-}

    I am guessing this won’t be a popular view, but I am
    having a tough time getting that the people who hate welfare for those
    who really need it, created this bail out???

    • ken

      I think the idea is keep families out of the homeless shelters and food lines. For that alone, it’s a handout worth giving and will pay back many times over in the long term.