Richmond's Eminent Domain Program: It Could Really Happen

Richmond, California’s plan to use eminent domain to free city homeowners from underwater mortgages took a number of steps forward recently. Until this month, I would have given very long odds against Richmond actually going ahead with the plan, but now I would place the chances at close to 50/50.

The first development occurred last week in Washington with the Senate’s confirmation of Melvin Watt as Director of the Federal Home Finance Agency – which regulates Freddie Mac and Fannie Mae.  Under Acting Director Ed DeMarco, the agency had suggested it might prevent GSE financing in Richmond if the city moved forward with its plan to seize properties under the guise of eminent domain. The threat of not being able to get a Fannie or Freddie insured mortgage would have inflamed local opposition to the program. But, given Watt’s more progressive orientation, I doubt that he will continue DeMarco’s resistance. I suspect Watt is much more likely to look at the situation through the “little people vs. big banks” lens than his predecessor – whose career was devoted to the health of the home financing market.

The other developments occurred Tuesday night at the City Council meeting, the video of which is available here (most of the relevant discussion can be found between the 3 hour and 6 hour marks).  Mayor Gayle McLaughlin proposed and won passage of a motion that fine-tuned the program in a couple of important ways.

First, her measure imposed guidelines limiting the eminent domain program to mortgages below the conforming loan limit (now $729,750) and in struggling neighborhoods. This change addresses a revelation first made here at ExpectedLoss and later picked up in a WSJ blog and by the San Francisco Chronicle: that the program would have benefitted owners of some very expensive properties in affluent neighborhoods.

Second, the McLaughlin proposal calls for the eminent domain power to be exercised by a “Joint Powers Authority” rather than by the city itself. As reported by the Chronicle’s Carolyn Said, this change allows the eminent domain action to be approved by only a simple majority vote – rather than a super-majority as previously required. There appear to now be three solid “no” votes out of the seven officials who vote on the Council, so the need for a super majority appeared to be a deal breaker.  McLaughlin should be able to hold onto the four votes necessary to create the JPA and implement the eminent domain program. 

But the JPA device imposes a new challenge: another city would have to agree to participate in the JPA. Although McLaughlin and her supporters listed a number of potential partners in California and elsewhere, none of these cities have gone as far down the eminent domain path as has Richmond. Indeed, it is possible that none of these cities will ever get beyond the talking stage. This assessment applies especially to San Francisco – a city whose skyrocketing home prices have left few mortgages underwater.

A more likely candidate, El Monte, will need to be careful. The city declared a fiscal emergency in 2012 and some of its bonds carry non-investment grade ratings. Richmond has already been punished by the municipal bond market despite its superior fundamentals; it’s hard to see how a lesser credit like El Monte will attract investors if it goes ahead with eminent domain.

So the need to get a partner is a significant barrier – but not an insurmountable one. Undoubtedly, the ambitious folks at Mortgage Resolution Partners are very hard at work finding Richmond a mate. Of course, the path to finally condemning mortgages leads through the courthouse. Whether Richmond can prevail, with a very unusual interpretation of the takings clause, against a battalion of well-financed Wall Street lawyers is another bet entirely.