Richmond: Divided City Council votes to stay on course with plan to use eminent domain to seize mortgages
By Robert Rogers
Contra Costa Times
Posted:   09/10/2013 10:11:09 PM PDT
Updated:   09/11/2013 11:07:31 AM PDT

http://www.contracostatimes.com/west-county-times/ci_24066384/hundreds-show-up-at-richmond-council-meeting-speak.

RICHMOND -- A divided City Council staved off fierce opposition Wednesday morning and voted to stay on course with a plan that would make Richmond the first city in the nation to use eminent domain to seize underwater mortgages in a bid to keep local residents in their homes. But with resistance to the plan growing, it remains in doubt whether proponents ultimately can muster the necessary council votes to seize the mortgages.

After hours of debate, the council voted 4-3 to approve Mayor Gayle McLaughlin's proposal, which calls on city staff to continue crafting a plan with investment firm Mortgage Resolution Partners (MRP) and form a Joint Powers Authority to administer the program and draw in more cities as partners.
While the four votes were sufficient to continue the partnership with MRP for now, they won't be enough to actually invoke eminent domain to seize the mortgages. That approval must come with a supermajority of five of seven votes, per state law.
Proponents' hopes for that fifth now likely rest with Councilman Jim Rogers, who floated a resolution Tuesday to move forward only if the city was fully protected against a potentially costly Wall Street lawsuit.
"A 1-percent chance of bankruptcy with this program is a deal breaker for me," said Rogers, who voted against McLaughlin's proposal before seeing his own fail by a 5-2 vote.
The city considered three options Tuesday night, but with more than 200 public speakers signed up to speak on the divisive topic, the votes didn't come until after 1 a.m.
Critics said the city faces dire legal and financial consequences if it pursues the unprecedented plan. Banks are suing the city in federal court to halt the plan, and investors have shunned Richmond's municipal bonds in recent weeks.
But McLaughlin was undeterred.
"Waiting for the next wave of foreclosures is the real risk," McLaughlin said. "It's time for us to take a stand."
Richmond has threatened to invoke eminent domain if private label security trusts for more than 620 delinquent and performing underwater mortgages reject offers made by the city to buy the loans at deep discounts pegged to their properties' current appraised prices. The city would work with MRP to refinance the mortgages and reduce their principal.
Councilman Nat Bates proposed to kill the plan, saying the risks to the city's economy were too great. McLaughlin sought to move forward with developing the plan and creating a JPA to draw in more cities as partners.
Bates' bid was rejected by 5-2 votes. Rogers, Bates and Councilman Corky Boozé were the three dissenters on the plan that passed.

Richmond residents and homeowners attend a City Council meeting at Richmond Memorial Auditorium on Sept. 10, 2013. The council decided to become the first city in the country to use eminent domain to seize underwater mortgages. (Ray Chavez/Staff)

Backers of the plan, led by McLaughlin, say the best way to stem foreclosures is to buy or seize underwater mortgages, slash them to current market value, and give the homeowners new loans with lower payments.
The idea would be financed by MRP, an investment firm that has unsuccessfully sought to partner with several other cities in the past year. Most recently, the City Council in North Las Vegas, Nev., last week voted 5-0 to reject partnering with MRP, a move that came after months of back and forth by proponents and investment groups.
Richmond would be the first city to use eminent domain powers to acquire mortgages. Assorted challenges mounted in recent weeks, including revelations that the city may not be able to refinance its municipal bonds and is being sued by banks on behalf of mortgage investors.
Last month, millions of dollars in the city's bonds were shunned by investors, leading some to speculate it was a result of the eminent domain plan. McLaughlin said she hoped other cities would join the joint powers authority. City Manager Bill Lindsay said it's crucial that the city doesn't face Wall Street alone.
"I would put myself in the go forward cautiously camp," Lindsay said. "But there is concern about being the single entity going forward ... economic sanctions can be used against one city effectively."
Opponents, led by Wall Street banks and the mortgage industry, hoped to halt the plan with a combination of marketing efforts, appeals to council members and in court actions. Banks acting as trustees for mortgage-bond investors sued in federal court, arguing that the city's plan is unconstitutional. Mortgage industry representatives say the plan would cause credit to dry up in the city and drive down rebounding home values.
"The mayor wants to call it redlining," said Jeffrey Wright, former president of the West Contra Costa Association of Realtors. "The mortgage industry characterizes it as prudent lending practices, managing risk."
Although MRP has agreed to pay all legal expenses incurred by the city in defending legal challenges to eminent domain seizures, the firm has not been able to secure insurance for the city against a legal judgment.
Lindsay acknowledged that the city faces some risk.
"There is a risk to the city ... in a catastrophic case," Lindsay said.
He added that if it goes forward with the plan, the council "needs to be concerned about the effect on the city's ability to access the credit markets."
On Thursday, U.S. District Judge Charles Breyer will hear banks' lawsuit seeking a temporary injunction against the plan. A counter claim filed Monday by nonprofit legal and civil-rights groups argues that if the mortgage industry shuns Richmond borrowers, it would violate fair-lending laws.
About 300 residents and a gaggle of media attended the meeting, which was held in the Richmond Memorial Auditorium rather than the council chamber because of the high turnout.
Both sides whipped up their bases before Tuesday's meeting. Backers gathered in City Hall for a news conference calling on council members to support the plan. Opponents staged at Caspers Hot Dogs across the street from City Hall before descending on the meeting.
At the news conference, McLaughlin called threats of a credit crunch if the city proceeds with the plan "sinister," and said the lawsuit to squelch it is "without merit."
"The law is on our side," McLaughlin said.
Rogers said MRP decided weeks ago to not purchase insurance for the city because of steep costs. Internal emails among city staff last month indicated that MRP was unable to secure insurance because of widespread media coverage of the risky, unprecedented plan.
"They changed their game plan, and that's a big deal to me," Rogers said. "The empire has struck back, and if we lose a big judgment in court, who it's really going to hurt is our low-income residents."
Councilman Tom Butt said the risk protection only needs to be resolved before the city actually seizes mortgages, adding that the city should not be cowed by litigious bluster from the mortgage industry and Wall Street banks.
"Everybody up here understands and is concerned about the risk factor," Butt said. "But we don't need to draw a line in the sand right now ... what we have here is a giant game of chicken, and the question is who is going to blink first."

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