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?

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