Controversial Plan to Use Eminent Domain to Seize Underwater Mortgages Advances in California

The following article was written by Laura Englehart, Law Clerk at Kohrman Jackson & Krantz and a law student at CSU's Cleveland-Marshall College of Law

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In an attempt to keep residents in their homes and prevent foreclosures, municipal leaders in Richmond, California are advancing a plan that allows the city to use its eminent domain powers to seize and refinance underwater mortgages.  While Richmond is still far from actually executing it, the controversial plan could have far-reaching effects if it continues to move forward.  Because Ohio is similarly struggling with an abundance of underwater mortgages, Ohio’s local lawmakers, lawyers, realtors, and other interested parties should take note of how the debate and implementation proceed.

The power of eminent domain allows a government to take private property for public use, but Richmond would be the first to use this power to seize underwater mortgages.  A mortgage is underwater when a homeowner owes more on the home than it is worth.  According to Zillow, 45% of homes in Richmond were underwater in the second quarter of 2013.  

In July, the City of Richmond sent letters to mortgage servicers and trustees offering to buy 624 underwater mortgages at considerable discounts and has indicated that it can otherwise use eminent domain to forcibly take the mortgages.  Upon seizing these kinds of mortgages, the city intends to compensate the banks at fair market value and would then refinance the mortgages to make them more-affordable for homeowners.

 

Housing and community advocates who support using eminent domain in this way believe it is a mechanism that can help stop the housing crisis that is devastating local communities by lowering principal balances and enabling more homeowners to stay in their homes.  Those in opposition argue that it will create a chilling effect by making banks unwilling to enter into future mortgage agreements in Richmond. The Federal Housing Finance Agency has already stated that Fannie Mae and Freddie Mac should stop doing business in places that approve the use of eminent domain to seize and refinance underwater mortgages, effectively eliminating mortgage financing.

 

Investors holding the mortgages in Richmond sued the city through their Mortgage-bond trustees Wells Fargo, Deutsche Bank, and The Bank of New York Mellon and sought an injunction to halt the plan.  Last week, however, U.S. District Court Judge Charles Breyer dismissed the case on grounds that the lawsuit was premature, as Richmond City Council has not yet voted to approve the use of eminent domain. Regardless of the ruling, whether this is a legitimate use of eminent domain remains undecided, and further lawsuits are expected as Richmond continues to move forward. 

 

Lawyers and stakeholders in Ohio should stay abreast of this ongoing controversy because Ohio is also struggling with the magnitude of the housing crisis and has a similarly high percentage of underwater mortgages. According to Zillow, in Ohio 35% homes in Lucas County (Toledo); 32% of homes in Montgomery County (Dayton), 30% of homes in Franklin County (Columbus) and Cuyahoga County (Cleveland), and 28% of homes in Hamilton County (Cincinnati) are underwater.  Other jurisdictions across the nation are already exploring whether eminent domain can or should be used as a new tool to seize and refinance underwater mortgages to stop such homes from going into foreclosure. The eventual outcome in Richmond will have widespread influence.