California City Threatens Investors, Lenders with Eminent Domain if They Won’t Take a Loss

The city of Richmond believes that the best way to prevent tumbling property values is to exercise eminent domain, but this could destroy the lending industry.

If certain lenders and investors in the Richmond, California area will not agree to sell more than 600 underwater mortgages for less than the homes that secure them are worth, then the city of Richmond says it will just take the homes anyway. Richmond is the first city in the country to move forward with a controversial plan to use the power of eminent domain to seize underwater properties if the mortgage-holders will not take a loss on the properties in order to keep the current homeowners in residence. “If they are unwilling to negotiate a sale of the loans, which we want them to do, then we will consider using eminent domain as another options to purchase these loans at fair market value,” warned city mayor Gayle McLaughlin[1]. The strategy relies on the city’s ability to constitutionally enforce the power of eminent domain to condemn and seize the mortgages. Once the city has control of the notes, it plans to help the homeowners refinance.

Not surprisingly, many industry groups, investors, and even homeowners have concerns about this plan, which definitely pushes the boundaries of private property rights. “Both federal and California law clearly show that this scheme is illegal,” said the American Securitization Forum in response to McLaughlin’s announcement[2]. “The practical effect of this proposal will be that individual investors…will see their assets and savings arbitrarily and, we believe, unconstitutionally, taken,” warned Securities Industry and Financial Markets Association (SIFMA) CEO Judd Gregg. Gregg added that the move “will not help expand mortgage credit availability in this country.” The FHFA and the Mortgage Bankers Association (MBA) also warned that Richmond’s threat could “undermine and have a chilling effect on the extension of credit.”

Do you think that this scheme is worth the risk in order to help the homeowners, or should Richmond keep eminent domain out of the equation?

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Comments (25)

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  1. Mark says:

    Desperate people do desperate things.

  2. Dawn says:

    This is utterly ridiculous on the part of the Commie-state of California! They should stay out of it totally, but if they want to stick their nose in where it doesn’t belong, they should at least give the mortgage investor the option of taking the amount they are proposing. Notice the proposal is for homeowners “underwater”, not necessarily in default or any other noted hardship. They can plan on a major lawsuit from the mortgage investors.

  3. James says:

    People may remember the Supreme Court Decision regarding eminent domain! There should have been an outcry at the time. Eminent Domain was designed so individuals could not hold hostage the people of the United States for public USE of the land(s). Now it has become public GOOD, which can be defined by Richmond as stealing the control of the houses and giving them back to the people who owe the mortgages-if they want, or maybe keep them and sell them for a profit, or bull dose them. Why not? Communism is defined as government OWNERSHIP of the land with no private ownership. Well, here we are! What about the right to contract without government interference guaranteed by the constitution? Well they can just decide they want a different agreement and nullify the contracts between the banks and the people. Constitutional? No government interference?

  4. Lynn Chase Burke says:

    Who gives a crap about the investors that should not have been involved to begin with? That’s what caused the problem was bankers using investor money to fund the houses and lied to the suckers er investors and the investors in their rush for a good roi bought up the MBS ‘s like crazy and drove the housing bubble! It’s the PROPERTT OWNER That should have first consideration over EVERYONE ELSE! WHO IS ADVOCATING FOR THE PROPERTY OWNER? ? WHAT HAPPENED TO PROPERTY RIGHTS? ? McGlaughflin works for the banksters! Duh! Of course he doesn’t want the loans written down! Crooks.

    • Alex says:

      Lynn I agree with you. Also,DeMarco should close his mouth. As head of the FHFA, he is acting as a professional “receivership holder”. However, as a Bond holder (since that is what Mortgage B

  5. Lynn Chase Burke says:

    “Who gives a crap about the investors that should not have been involved to begin with? That’s what caused the problem was bankers using investor money to fund the houses and lied to the suckers er investors and the investors in their rush for a good roi bought up the MBS ‘s like crazy and drove the housing bubble! It’s the PROPERTT OWNER That should have first consideration over EVERYONE ELSE! WHO IS ADVOCATING FOR THE PROPERTY OWNER? ? WHAT HAPPENED TO PROPERTY RIGHTS? ? McGlaughflin works for the banksters! Duh! Of course he doesn’t want the loans written down! Crooks. ”

    The loans should be written down by to FMV SINCE the bubble was only based on the banksters scheme however, that said, the banksters should still owe the investors because they are the ones that duped the investors and made trillions in the process via derivatives credit default swaps CDO’s etc. etc. They should pay not the taxpayers or investors or duped borrowers.

  6. Alex says:

    Lynn I agree with you. Also,DeMarco should close his mouth. As head of the FHFA, is acting as a professional “receivership holder”. However, as a Bond holder (since that is what Mortgage Backed securities are in fact) he has no influence on mortgage bonds not held by the FHFA. He can not comment on investors that are not bond holders of these particular mortgage bonds. Bonds held in a Real Estate Investment Trust that are not owned by the FHFA have no connection to Freddie Mac and Freddie Mae.
    eMarco has held the line because he cares more about the principle — in this case, the supposedly sacred obligation of debt repayment — than about the societal consequences of too much principal. I assert, that DeMarco is a bleeding-cash conservative, an ideologue so keen on punishing those he views as morally derelict — people who can no longer pay their bills — that he is willing to squander taxpayer dollars toward ensuring that they suffer the ultimate penalty: relinquishing their homes.

  7. wt says:

    I think homeowners should get their mortgages reduce to 50% so that they can now remain in their homes. Why do the banks keep saying the don’t want the properties and want to help, yet you continue to observe foreclosures everyday. THEY ARE LIARS!! They want your assets and they will hold on to them (SHADOW INVENTORY)until values are sky high again. What homeowners need to do now is stop paying the banks anymore monthly mortgage payments and then start another “OCCUPIED MOVEMENT” specially in low income county’s like in San Bernardino County for communities in both city and county limits of the high desert in Victorville/Adelanto/Apple Valley/Hesperia/Barstow and anywhere else low income is at. Then go adopted HUGE PIT BULLS AND DOBBIES THEN SET THEM IN THE FRONT YARDS TO KEEP THE BANKS AND INVESTORS AWAY!!

    • James says:

      Of course the banks should not get their money back! Why should they? They did not pay the money out. They did not give money to the sellers of the house. They did not use the savings of their depositors to fuel the economy by lending. They are just scavengers stealing money from people who should not owe it. RIGHT!?? Sure the banks have done unscrupulous things and they should be held accountable. What about the obligation of the people who purchased homes? They should have none? Take from those who have and give it to those who don’t. “From those according to their ability to those according to their need.” Sound familiar?

      • Alex says:

        James, your analogy to Karl Marx and Friedrich Engels is not valid, because when Marx wrote “The Communist Manifesto” and “DAS Kapital”, is a 19th Century book that applies to government take over of all private property, and not the foreclosure crisis in this instance.

  8. James says:

    Government intervention was a major cause of the problem. The banks were forced to give these sub-prime loans and the government guaranteed them. They removed normal scrutiny of the borrowers. So people who could not afford to buy homes got them any way. This is social engineering by the government. Remember when EVERYONE was required to put 20% down on a house? So people were required to budget, save, scrimp, work hard, sacrifice and get the down payment. When they got the house it meant something. When you walk in as say, I want a house, I got the money, give it to me…well see what has happened. What is wrong with investors providing money to people who do not have it? If it is investors who own the homes and they are renting them, they can afford to make the payments. It is the people who in many cases purchased out of their range of affordability due to government intervention that helped fuel the fire here.

    • Alex says:

      I agree with you on this point James. All borrowers should have skin in the game. The FHA requirement of only 3.5% down is way too low and their credit limit of only a 620 FICO score is too low as well. If a borrower doesn’t at least have 10% down, and at least a 680 FICO, even the FHA should reject such borrowers. The crazy loans at 100% LTV and 125% LTV or the 80/20 Jumbo loans were simply irresponsible! But, although borrowers have an obligation not to take on more house than they can afford, a borrower doesn’t know what is front end or back end debt/income ratio. A borrower doesn’t know what is 25% of net income or 31% of gross income. Most borrowers are not loan officers and don’t understand how a loan is evaluated. The burdern is on the banks not to make such loans in the first place. So while I agree with you in general, I still think the brunt of the blame is the banks,not the borrowers.

      • Get Mikey says:

        “No one watches out for you quite like you watch out for yourself.”

        Have these borrowers never heard that saying or something similar at least ONCE in their lives??? Do they not know that the rest of the world is not responsible for their well being–especially their financial well being–as much as they themselves are?

        While the brunt of the blame might be able to be laid at the feet of the banks, if the borrowers wanted to buy a home then they should have wanted to understand the process so that they could be informed consumers. They should have taken the time to learn each of those things you mention . . . the 25% of net income and 31% of gross income . . . and the other things that decide how a loan is evaluated and whether or not they can qualify for it. After all, they are the ones to be stuck with making the payments for the next 7, 15, or possibly even 30 years if they do not relocate and sell like most people do prior to the end of their loan. Had they done so it’s quite possible that more than a few of them would have not gotten taken by slick mortgage brokers who did bait-and-switch by telling them one thing and then sticking them with loans that were structured differently that caused them to lose their homes when adjustable rates reset or other “gotcha’s” within the loans they signed up for.

        Because buying a home is such a large purchase it makes much sense to at least try to understand everything about the loan you are committing to make payments on because for most people it will be the single biggest purchase of their lives.

        Are you trying to tell me they cannot take a little bit of time to understand what they have committed to spending a rather large chunk of their paychecks on for the next 15-30 years? If that’s the case then they don’t deserve to buy a home yet; they’re not ready. And that is true even if they have the money and can easily afford it!

        “The burden is on the banks not to make such loans in the first place.”

        No. The burden is on the consumer pledging to spend their money for the next 30 years. It behooves them to spend it wisely!

        And they should know that the banker is in it to make a profit, and that profit comes to the banker in the form of money from the consumer’s wallet. This profit being the case should at the very least be a HINT that the banker will not always have their best interests at heart.

  9. pc says:

    Are you people really that clueless? What bank would ever do a loan where people could just say…look…my value dropped, I don’t want to pay? If values go up…does the bank get any profit?…NO! So what you want is the bank to take all the risk, with no upside? Sounds like a typical victim mentality that is ruining this country. Stop blaming the banks…Buyer wanted a home, a bank was nice enough to offer to loan buyer money under certain rules and buyer agreed. Don’t blame the bank. It is called PERSONAL RESPONSIBILITY!

    • Alex says:

      Yes, you are right, banks did loan money, and they do have signed promissory notes that the borrower has to pay back. However, the rules of the game have changed in the last 14 years. After the repeal of the Glass steagall Act (1933-1999) the walls between
      savings and loans, and commercial banks and investment banks were gone. That allowed Wall Street to put mom-and-pop mortgages on Wall Street. Your bank, was no longer your lender. Once the
      Note has been sold, it has been sold forever and the selling party loses control of it forever. The banks are now merely servicers, not lenders, and therefore, no longer hold these NOTES.
      However, due to the repeal of the Glass steagall Act that has kept us safe for 66 years, the vultures of Wall Street, investment bankers, put these mortgages on the street as investment products. This was done using an accounting rule called FASB-140.

      The reason that Imminent domain is being invoked by these California law makers (unfairly in this case I may add), is because of the general refusal to write down principal in any in all cases. In theory this steals away money from investors that bought mortgage backed securities, but in reality, that money has been lost anyhow. They can go to court and sue to win. But who will pay them on losses on collateral that the market suffered? The FHFA is an entity that has Freddie Mac and Freddie Mae in receivership, by the US government. In effect,it is a bond holder that is owned by the government itself. Therefore,it has no greater rights than any other bond holder. DeMarco is the director, a goverment servant essentially, of these two giants. However,in private label Real Estate Investment Trusts,not government owned, he has no greater say than any other bond holder.

      The Trust, that holds the NOTES to the collateral,is in danger,if the value of the underlying collateral is far below the value of the Liens against the collateral.In effect,the Trust is bankrupt. The Trust has the legal ability to reduce risk. So the argument
      that invidual loan contracts are invalidated is nonsense, because they are no longer individual private contracts, that borrowers signed with their Lender,but in effect, since the lenders sold these NOTES into bundles and pooled them together,the contractual
      obligation between borrower and lender is then passed along into the Trust,using rule FASB-140. Therefore, the contracts are no longer individual contracts between lender and borrower, and therefore,no longer any real estate contract is actually

      FASB-140 states: “This Statement replaces FASB Statement No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. It revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of Statement 125′s provisions without reconsideration.” Furthermore,it states: Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished.”
      So essentially,by the same logic that mortgages are securitized and placed into a REIT, so too we can govern these mortgages. It is now done at the collective level of a collection of Pooling and Servicing Agreements held within the specific trust or trusts,and not individual mortgage contracts.

      I don’t know what DeMarco’s specific legal mandate is. The taxpayers and the homeowners are essentially one and the same. But there is simply no way that it makes sense for an agency director to use his position to block implementation of the President’s economic policy, not because it would hurt his agency’s operations, but simply because he disagrees with that policy. The question that is central to DeMarco’s argument is that hard working home owners that are not in default get no principal reduction, but those in default,who may have bought at the height of the market,or used their home like an ATM machine, are getting a break.In this regard,he’s perfectly right. But it doesn’t mean that a policy can
      instead be written for all those that are actually NOT in default. Those who are indeed in default,would have to go through the normal loan modification process,which is more focused on affordability and monthly paymenbt reduction based on lowering the interest
      rate rather than principal reduction. Those,that can be saved,should be. Those that have too much overall debt relative to their income will go through the normal channels of bankruptsy courts and foreclosure courts. After those who are currently in default have demonstrated proper payment behavior for 2 years in a row,they are then considered “lower risk” and can join the ranks of home owners (those that were not in default in the first place) and can likewise join the ranks of principal reduction to present market value. Essentially, and EARNED principal reduction is what is right approach is what I’m advocating. These imminent domain people that are doing this as a way to get principal reduction are over-stepping in my opinion, very badly, but it doesn’t invalidate the argument of principal reduction as a whole.

      His argument about “moral hazard” are not really very convincing. We are seeing record settlements of banks with the goverment. For example,we have seen UBS settling for nearly 880 Million,or nearly 1 Billion. We see GMAC settling for roughly 230 Million, as I recall. We see Chase and Wachovia and the biggest of all, Bank of America,all combined settling for 26 Billion,that is to say, 26 thousand million. You mean to say all these banks that did so
      much damage to our economy are settling out of court,which is essentially an admission of guilt,without the trial, and did alot of wrong, but ordinary home owners get shafted?

      Businesses dump bad assets all the time,but hard working home owners get to see their home equity destroyed through no fault of their own and companies like AIG bankrupt,and Lehman Brothers,and we see banks selling credit default swaps against the very loans that they made and against their very own borrowers?! So it’s ok for banks to lie, and steal,and forge documents against ordinary consumers in the robosigning mortgage Notes that they no longer owned, but consumers should be noble and honor their contracts with their lender,which in reality,is no longer their lender?!

      DeMarco has to go. He is holding the recovery back and hardest hit communities like California,Nevada, New York,Florida,Chicago,Michigan and many others are some our largest
      employment centers.Ordinary borrowers are not in a position to evaluate mortgage risk: but banks are! They are in the business of evaluating risk-based lending, but they were so hungry and greedy for Mortgage Backed Securities,at any cost,they nearly sent us into an economic depression,and to add insult to injury were these very same banks that were bailed out for nearly 1.2 Trillion dollars. Also,investors that bought these securities lost in value and they were lied to by the ratings agencies and by the banks.
      They can go to court and try to get their money back, but who will pay them? It’s much simpler to give them huge tax write-offs for 10 or 15 years for the lost value,make the portfolios safer actually making the collateral in those portfolios closer to actual market value, therefore, de-risk the portfolios and that homeowners will stop paying on houses that lost value for 30%-50%.

      It’s time we got some fair play from our representatives. DeMarco in being a director of a government owned receivership is supposedly representing “we the people”.Is he? He is helping investors that bought mortgage backed securities. Is he?

      So my argument is:
      a) Rule FASB-140 now governs the borrowers responsibility with the REIT, no longer their original
      mortgage contract
      b) That rule doesn’t prohibit principal write down (earned ,not simply given)
      c) The investors were hurt and we are not really stripping them of loaned dollars. Let the banks that
      originated these crappy loans pay the investors: that’s essentially what these settlements are.
      d) We need to wind down the FHFA by selling off 75 billion every 5 years until it is gone
      e) In a fire, you don’t ask the person, “are you able to pay or not the pay”. Our country
      is called the UNITED States of America. We’re all United in this together.

  10. Shannon says:

    Sorry pc, but banks don’t lend any money anyhow. The “borrowers” that purchased the homes are the ones that actually funded the purchase. Banks don’t really lend squat. They get paid 5-6 different ways and never put out a dime until it comes to paying for the cost of foreclosure. I bet you don’t even know how it works.

    Signature on the docs creates a negotiable instrument. That instrument is collateral. Collateral=Money. They divvy that up into a bunch of interests and sell them to investors in tranches. Then the banks and investors all take out massive credit default swaps, which is default insurance, which is actually hedging insurance. They can’t lose! When investors pay for the interests, does that money get applied to the “borrower’s” account? Nope, it goes in the bank’s pocket. But, the bank doesn’t own the note, so they have no right to sell it without crediting the account for it. They take tax credits and receive insurance monies, all which should be applied to the account but is not. That is tax fraud and insurance fraud.

    Banks lend credit – which is illegal. Federal Reserve Policies and Procedures and the GAAP requirements imposed on all FDIC financial institutions prohibit them from lending money from their own assets and their depositors assets. BANKS DON’T LEND ANYONE ANY MONEY! They create it out of thin air, utilizing the signature on the security agreement and negotiable instruments. ITS FRAUD and they’re in it deep!

  11. Jim says:

    Wow Lynn, Go get ’em!! We had the eminent domain thing happen here too. They, the city council of Arlington, Texas decided to condemn a bunch of houses, from old people mainly so they could build a little stadium called Cowboys Stadium. What’s going to stop your city council from changing their minds, after all don’t they need money. If you believe Gayle is worried about ‘the people’ your are a bigger fool than those who don’t get their way, so they simply ignore the laws put here to protect us all and keep things orderly. History is full of those with good intentions, i.e. Hitler, Stalin, Napoleon, Sadam, all started out wanting to make things better, because THEY knew best, screw the rule of law.

  12. Joe grand says:

    The fair market value of the underlying property is not the sole item in the determination of the fair market value of the mortgage. Generally, a mortgage and underlying promissory note carries personal liability of the debtor as well as a security interest in the property. Thus, if a bank has a $400,000 mortgage balance, forecloses and sells the underlying property for $250,000, it still has a cause of action against the debtor for the balance of $150,000. The mortgagee can sue, obtain a judgment and garnishee wages, bank accounts and other assets in order to recover the remaining balance. If the exercise of eminent domain takes the mortgage for say 85% of the value of the underlying property, they have not compensated the investor for the value of his right to sue and collect. I assume that the taking of the mortgage extinguishes this right of suit to recover the balance. No one seems to have mentioned this element of value in the hands of the investor. But the investor is losing a valuable right without compensation and that constitutes an unlawful taking of property.

    • Alex says:

      In theory,you are right,in a recourse state like New York,the difference between the short sale price and the value of the note can be a deficiency judgment against the borrower,who signed the
      promissory note for the full face value,not for the market value.This is not true in non-recourse states,only in recourse states. However, your argument is valid in the banking system of the past:your bank was actually your lender and actually owned the security Instrument. You borrowed the money,and for one reason or another couldn’t pay it back,the bank is now entitled to collect the collateral.You were loaned money,you enjoyed the house,and if you can’t pay, well,the judge had no issues in foreclosing and truthfully speaking,no borrower saw a problem with that.

      However,the law is very clear on this point:
      a) In order to foreclose,your lender must indeed own the NOTE. IF they don’t,they don’t have the right to foreclose.

      b) But since millions of loans were packaged and sold as mortgage backed securities,the banks switched roles from lender to servicer, almost immediately and re-capitalized. Once the NOTE is sold, it is
      sold forever, and the seller loses all control of it.

      Imagine this example. Imagine that Harry made you a loan and hired John as his payment collection agent on his behalf. You signed a promissory NOTE and pledged some collateral to Harry.If you default,
      who can collect,Harry or John? It’s clearly Harry. Now imagine a step further. What if John originally loaned you the money,but wanted the lump sum back right away,not the money trickling in the form of payments. So if John originally loaned you money,and then sold the loan to Harry, the promissory note is a negotiable instrument; it is a like a cashier’s check that was signed over. Harry cashed out John,and got possession of the promissory NOTE,and
      now Harry is now entitled to the payments,not John. John stays along as a payment collection agent on Harry’s behalf, but no longer owns the instrument. If you default,who has the right to the collateral? Is is Harry,or John? Clearly it is Harry. But John comes along and tries to collect anyhow. Remember,once John sold the NOTE to Harry,he sold it forever; he’s not entitled to be paid twice. He got paid in full at the time of selling the NOTE. In my simplistic example, John is GMAC,Chase,etc, and Harry is Freddie Mae.

      So essentially,the banks are trying to collect twice,on instruments that they’ve already been paid for IN FULL, at the time of sale.

      Once loans are securitized,they are no longer individual notes,but are now fractionally owned. It’s like putting a carrot through a juicing machine called securitization. What you get is pulp and carrot juice,but you can never get the whole carrot back as a whole. Once it is fractionally owned instrument,it is no
      longer whole.Therefore,who owns your mortgage NOTE? NOBODY!!
      Each investor owns a small percentage of every note in the portfolio, but they can’t go after the individual borrowers since they don’t have claim to in the underlying instrument in WHOLE.

      So essentially,the investors use the collection arms and the muscle of the banks to foreclose on borrowers,but these banks don’t have the legal standing to foreclose: they are no longer the NOTE holders.

      Giving investors strong tax credits for lost value and writing down notes closer to present market value de-risks the portfolios. It’s a big mess,and the only solution is not examining each loan one at a time,but massive action on a broad scale. So in theory,investors would be compensated,and given sweet tax shelters as well. Furthermore,if the house rises in value in next 5 years, the borrower would need to agree to split the equity gain. That way,it’s not banks lose,investors lose,and borrowers win,but all sides win.

      • Get Mikey says:

        Just wanted to say . . .

        Your “Harry and John” explanation of the big picture here is the most clear-cut and easy-to-understand explanation I have ever seen!

  13. Tom says:

    The people of Richmond should help out with urban renewal like they did in Detroit. Burn them down. The mortgage holders will get reimbursed by insurance companies current market value and the city will not have to go to such illegal lengths as eminent domain. I am not advocating anyone actually burn down buildings. That is illegal. But just for the sake of trying to find solutions, well, eventually they will probably get ransacked anyway. That is what happens to abandoned buildings. They get destroyed. The trouble with this plan is that then the mortgagors will be forced to take all that inventory off their books and declare a loss at market values now current. They will lose their a**es and many will fold. They want to keep the toxic junk on their books at the value they paid out. Not gonna happen if they burn. So, they will fight it.
    Richmond wants to rehabilitate these homes and get folks in them. That is a good plan actually. Just one problem: the bankers and mortgage lenders will fight them tooth and nail. So, when things get really bad and people squat in those homes and wreck them for ever, everyone loses.
    And remember, Richmond is broke and can hardly pay their firefighters or police. What will happen when those houses start to burn? They will just burn down. That’s what. Why risk life and limb on ruined real estate. Now is the time to rehabilitate. Not later when those homes are wrecked. It may not be entirely legal, but it makes sense.

  14. Pascal says:

    Not to mention taxes…

    But ultimately, those with a mortgage are not homeowners, they are loan owners.

  15. Not surprising that politicians, and especially Kalifornia politicians, don’t know the difference between the public good and maintaining their political selves in the style to which they have become accustomed. They need to be slapped down – hard! The “value” of the properties they tax was artificially inflated…by government. Now reality has set in. They’d better learn to live with it.

  16. mark says:

    I’m not for govt. intervention here because it’s disguised as helping the little guy but it isn’t. The banks have no risk because they don’t lend money, the homeowner is the lender, and they should educate themselves but most won’t because they watch sports and pornography and let their rights get taken away

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