A lot of Americans were miffed when the Federal government decided to take over the healthcare industry and the auto industry, and even less happy when the failures of both takeovers bubbled to the surface.But the latest government attempt to seize a chunk of private industry is coming from an unexpected source: This time, it’s Richmond CA Mayor Gayle McLaughlin, a retired schoolteacher. She has been elected mayor of this value-deflated city of 103,000 twice, but the job has clearly gone to her head, since she now thinks she outranks the CEOs of Wells Fargo, Bank of America, and Fannie Mae, just to name a few.
Property values in California are slowly crawling back uphill, but not in Richmond, where roughly half of all homeowners with mortgages are still underwater. Some people owe up to three or four times more than their home is currently worth. A lot of people – including POTUS – have talked about solving the problem, but Mayor McLaughlin has taken the first action of its kind in the country.
On July 29, the city sent letters to 32 different lenders who own and service 624 underwater loans, offering to buy them at “fair market value.” In some cases, that could be as low as 25 cents on the dollar.
In about 200 cases, the homeowner is already behind on the payments. Over 400 other mortgages are current, but the city thinks they’re at risk of default, because home values have fallen so much that the homeowner has little incentive to keep paying.
What kind of offer is the city making these lenders?
Here’s a hypothetical example the city uses: 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. Then, the city would write down the $400,000 debt to $190,000 and allow the homeowner to refinance at the new amount, probably through a government program like Fannie Mae. The $30,000 difference goes to the city, the investors who put up the money to buy the loan, closing costs and a company called M.R.P. (More about this company shortly.) The homeowner would go from owing twice what the home is worth to having $10,000 in equity.
Like most Progressive schemes, this one has a warm, fuzzy acronym: CARES (Community Action to Restore Equity and Stability).
What gives Mayor McLaughlin the legal right to stage such a blatant takeover? If any bank declines Richmond’s purchase offers, the city plans to use eminent domain to condemn and buy the loans. Most of us think of eminent domain as the last resort to buy a barn that’s inconveniently stuck in the middle of a future Interstate, but some legal experts claim that all types of property, not just land and buildings, are subject to eminent domain if the government can show it is needed to promote the public good, in this case fighting blight and keeping communities intact.
The bank, of course, goes from being owed $400,000 that it might or might not collect, to getting a check for $160,000. Are they happy about having this deal stuffed down their bankerly throats? Would you be?
Not surprisingly, the banks will fight this tooth and nail. They warn that eminent domain seizures will start a blizzard of lawsuits and put a total freeze on mortgage lending in any city that tries this ploy.
That doesn’t bother Ms. McLaughlin. “We’re not willing to back down on this,” she said. “They can put forward as much pressure as they would like but I’m very committed to this program and I’m very committed to the well-being of our neighborhoods.”
At this point, you might be wondering how a retired schoolteacher came up with a complex plan to seize, rewrite, restructure and resecuritize hundreds of mortgages. While grading papers, did she somehow acquire the financial chops of a Goldman Sachs EVP?
Not exactly. This takeover plan looks to be the creation of a San Francisco company called Mortgage Resolution Partners (M.R.P.) Their website discusses the benefits of their offering in great detail. But essentially, they have created a new financial product that nets them $4,500 per transaction, and they plan to make a lot of transactions. And unless they get cities to put the legal muscle of eminent domain behind them, no deal.
M.R.P. has been shopping this product all over the country, to cities including North Las Vegas and El Monte and La Puente CA. For a while, San Bernardino County and two of its cities, Fontana and Ontario, were interested, but they saw the huge opposition and wisely backed out.
When you look at the herd animal politics of progressive cities all over the country, this M.R.P.- backed property seizure could gain some real traction. All it takes is for the first sheep to prance over the cliff, and many more are sure to follow. After all, this scheme could make a number of mayors look like a cross between Warren Buffett and Robin Hood.
The only risk is the total financial ruin of their little hamlets when they are pounced on by swarms of America’s most competent attorneys and bankers. What’s not to like?