The California City of Richmond has pursued a strategy occasionally discussed in public finance circles in recent years — employing the public power of eminent domain to seize property that sits “underwater” due to attached debt and the recent collapse of property values. With many such properties heading toward foreclosure, a national trend still underway, the city has chosen to sieze numerous properties in an effort to re-establish the current owners with more favorable financing of their own property.
A New York Times‘ lengthy piece details the mechanics of the proposal, which will surely trigger an extensive policy debate in California and perhaps elsewhere:
Richmond is offering to buy both current and delinquent loans. To defend against the charge that irresponsible homeowners who used their homes as A.T.M.’s are being helped at the expense of investors, the first pool of 626 loans does not include any homes with large second mortgages, said Steven M. Gluckstern, the chairman of Mortgage Resolution Partners.
The city is offering to buy the loans at what it considers the fair market value. In a hypothetical example, a home mortgaged for $400,000 is now worth $200,000. The city plans to buy the loan for $160,000, or about 80 percent of the value of the home, a discount that factors in the risk of default.
Then, the city would write down the debt to $190,000 and allow the homeowner to refinance at the new amount, probably through a government program. The $30,000 difference goes to the city, the investors who put up the money to buy the loan, closing costs and M.R.P. The homeowner would go from owing twice what the home is worth to having $10,000 in equity.