• By
  • Nick Timiraos
Xinhua/Zuma Press





Eminent domain allows a government to forcibly acquire property that is then reused in a way considered good for the public—new housing, roads or shopping centers. Owners of the properties are entitled to compensation, often determined by a court.

Instead of acquiring houses, Richmond and other cities would buy the mortgages from investors at a price below the property’s current market value. They could cut the loan principal to around 97.75% of the property’s market value and then refinance the loan into a government-backed mortgage.

At issue are loans that were pooled together and sold to investors as mortgage-backed securities. These so-called “private-label” securities were issued by Wall Street firms—not by Fannie Mae or Freddie Mac—and don’t have any government backing.

Working with the investment firm Mortgage Resolution Partners, city officials in Richmond said they identified 624 mortgages that they would condemn through eminent domain. Tax and legal rules governing those securities make it difficult—downright impossible, say some investors—to sell individual loans out of the trusts. Of the loans that Richmond wants to buy more than two thirds, or 444, are current on their payments, while 180 are delinquent.

The proposal is backed by community activists that say it would help residents shed high debt loads and avoid foreclosures that are hurting property values and eroding the tax base. “It’s the responsibility of banks to fix this, and they haven’t, so we’re taking it into our hands,” said Richmond Mayor Gayle McLaughlin last week.

The eminent-domain approach is extremely unpopular with mortgage investors that hold those loans. Investors worry that cities will offer too low a price for loans, especially those where borrowers are current on their payments. They also say that seizing loans would upend their expectations of loan performance that is used to determine how much they pay for those bonds.

The upshot is that, going forward, investors say they would require significant down payments or higher rates in communities where the threat of loan-seizures exists—much the way a sovereign-debt default can raise borrowing costs for a country.

Investors also say that eminent-domain advocates have understated the degree to which lenders have been able to modify mortgages. Of nearly 1,100 Richmond loans on owner-occupied homes that were current on their payments in June, some 42% of the loans had received modifications, according to CoreLogic data provided by RBS Securities. Around half of all borrowers whose loans had been modified received some form of principal forgiveness or forbearance, in which loan payments aren’t required on a portion of principal.