HOUSING FINANCE POLICY CENTER
URBAN
INSTITUTE
Eminent Domain
The Debate Distracts from Pressing Problems
Pamela Lee
The Urban Institute
October 22, 2013
About the Author
Pamela Lee is a research associate with the Housing Finance Policy Center and the Metropolitan
Housing and Communities Policy Center at the Urban Institute.
Thanks to Laurie Goodman, Ellen Seidman, Wei Li, Jim Parrott, Jun Zhu, and Rolf Pendall for
reviewing and assisting with the writing of this paper. Special thanks to Bing Bai for expert data
analysis, particularly for the CoreLogic HPI numbers.
Copyright © October 2013. The Urban Institute. Permission is granted for reproduction of this file,
with attribution to the Urban Institute.
The Housing Finance Policy Center (HFPC) aims to more effectively connect housing policy and
housing finance, and to provide timely, impartial analyses of policy issues, anticipating problems and
potential solutions and responding to them as they emerge. HFPC will enable the Urban Institute’s
work to both inform and be informed by greater understanding and analysis of how finance and
financial regulation, monetary policy, and global capital flows shape and impact the US housing
market, including the structure of housing credit (both ownership and rental), who is able to access
that credit, and on what terms.
The Urban Institute thanks The Citi Foundation and The John D. and Catherine T. MacArthur
Foundation for providing generous support at the leadership level to launch the Housing Finance
Policy Center. We also thank the Ford Foundation and the Open Society Foundation for their
additional support.
The Urban Institute is a nonprofit, nonpartisan policy research and educational organization that
examines the social, economic, and governance problems facing the nation. The views expressed are
those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.
Contents
JURISDICTIONS WITH AN INTEREST IN THE EMINENT DOMAIN STRATEGY
2
RICHMOND’S SITUATION
8
WHY IS THE PLAN CONTROVERSIAL?
9
IMPACT ON THE BROADER MARKETS
12
EXISTING EFFORTS HAVE NOT GONE AS FAR AS NEEDED
13
CONCLUSION
14
REFERENCES
16
NOTES
17
Eminent Domain
Richmond, California, recently approved a plan to assist residents with underwater mortgages 1 by offering
to purchase the mortgages and restructure them to more affordable terms. The city has said that if the
purchase offers are not accepted, it may use its powers of eminent domain to seize the loans. Several other
communities have also considered using eminent domain to assist underwater homeowners, arguing that
doing so will prevent foreclosures, stabilize the municipal tax base, and ensure the community’s economic
vitality. San Bernardino County was among the first to explore the plan, in 2012, but interest spread to
other communities. In this paper, we look at the municipalities that have considered using eminent domain
to seize underwater loans. We consider what these jurisdictions have in common and look more closely at
the challenges Richmond faces. Finally, we address the appropriateness of Richmond’s response to these
challenges.
While the use of eminent domain to assist underwater homeowners has only recently received
widespread attention, the strategy was initially suggested in 2008 in separate proposals offered by three
professors interested in developing effective, timely responses to the housing crisis. 2 Richmond has
revisited the idea, in large part, due to frustration with the lack of assistance from lenders and state and
federal policymakers for a community still struggling to recover from the housing market collapse.
Located in the mostly thriving San Francisco Bay Area, Richmond is an outlier among its wealthier
neighbors: it has notoriously high crime rates and a high concentration of poor-quality housing stock and
traditionally underserved sectors of the population. In addition, the city is the site of a major Chevron
refinery (where several industrial accidents have occurred), three chemical companies, eight Superfund
sites, dozens of toxic waste sites, and two rail yards.
In response to the city’s plan, two trustees, Wells Fargo and Deutsche Bank, filed suit on behalf of a
group of investors. 3 Although the case was dismissed on the grounds that it was premature, it will likely be
refiled should the city move forward as planned. Other financial institutions, trade groups, and banks have
signaled their intentions to pursue similar legal action and have threatened to restrict lending in any
municipality that implements such a plan. Several key policymakers also have weighed in: In early August,
the Federal Housing Finance Agency (FHFA), which regulates Fannie Mae and Freddie Mac, declared that
the plan “presents a clear threat to the safe and sound operations of [the government-sponsored entities]”
(Pollard 2013, 7) and that it would instruct lenders to “limit, restrict, or cease business activities” 4 in
jurisdictions contemplating the eminent domain plan. The Protecting American Taxpayers and
Homeowners (PATH) Act, which is the House GSE reform proposal, includes two provisions that would
prohibit Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA) from purchasing or
insuring mortgages in any municipality that has exercised eminent domain to seize mortgages over the past
five years. In the face of this increasing pressure, two communities considering similar eminent domain
proposals—San Bernardino County and North Las Vegas—ultimately decided not to proceed.
The controversial use of eminent domain to seize underwater loans is noteworthy for several reasons.
First, the plight of Richmond and similar communities is a symptom of an uneven housing recovery. 5
According to the Federal Reserve Bank of San Francisco, while national indicators show signs of housing
market improvement, these indicators may mask the continuing struggles of some low- and moderateincome communities (Choi 2013). Second, Richmond’s strategy shows frustration with existing private and
federal interventions in the housing market, along with a perception that policymakers and the lending
community see less urgency in addressing distress in the housing market. Lacking the ability to negotiate
with banks and without a federal stick to force banks to work more closely with communities, cities like
Richmond have turned to a more confrontational stance that bypasses both federal and state governments.
Jurisdictions with an Interest in the Eminent Domain Strategy
Several local jurisdictions have publicly expressed an interest in using eminent domain to seize underwater
loans. We examined these jurisdictions for commonalities and shared urban problems. In addition to
Richmond, we looked at El Monte, Fontana, Ontario, Pomona, Salinas, San Bernardino County, and
Stockton, in California; North Las Vegas, Nevada; Chicago, Illinois; Wayne County, Michigan; Brockton,
Massachusetts; Suffolk County, New York; and Irvington and Newark, New Jersey.
2
Housing Finance Policy Center
Table 1. Indicators for All Jurisdictions That Considered Seizing Underwater Loans through
Eminent Domain
Place
Richmond,
CA
El Monte, CA
Fontana, CA
Ontario, CA
Pomona, CA
Salinas, CA
San
Bernardino
County, CA
Stockton, CA
North Las
Vegas, NV
Chicago, IL
Wayne
County, MI
Brockton,
MA
Suffolk
County, NY
Newark, NJ
Irvington, NJ
United
States
Median
household
income
(MHI)
12.7%
11.4%
13.6%
13.5%
11.8%
11.3%
$54,554
$41,820
$64,058
$55,902
$50,893
$50,658
-6%
-1%
7%
1%
-3%
-11%
18%
22%
14%
16%
19%
20%
12%
5%
6%
6%
7%
6%
5%
2%
3%
3%
2%
3%
10%
3%
6%
6%
6%
5%
53%
41%
70%
58%
55%
45%
76%
68%
88%
82%
80%
80%
47%
51%
48%
43%
48%
51%
12.9%
15.7%
$55,853
$47,365
0%
2%
16%
22%
14 %
10%
4%
4%
7%
7%
64%
53%
78%
79%
41%
44%
10.4%
12%
$57,425
$47,371
-5%
-6%
14%
21%
14%
14%
5%
4%
9%
8%
61%
47%
89%
73%
40%
40%
17.4%
$41,886
-39%
23%
17%
4%
11%
67%
66%
32%
13.8%
$49,848
-3%
16%
9%
2%
6%
58%
79%
42%
6.4%
15.7%
15.1%
$87,187
$35,696
$41,538
-21%
2%
-13%
6%
26%
19%
13%
16%
16%
2%
5%
7%
6%
11%
9%
81%
25%
33%
71%
74%
82%
41%
56%
58%
8.7%
$52,762
-4%
14%
12%
2%
8%
66%
68%
29%
Unemployment
rate
Residents
living
below
poverty
level
Vacant
housing
units
Homeowner
vacancy
rate
Rental
vacancy
rate
Owneroccupied
Mortgaged
homeowners
paying at
least 35% of
income on
owner costs
Change
in MHI
since
2000
Census
Mortgaged
housing
units
Source: 2007–11 American Community Survey.
Note: Change in MHI was adjusted for inflation using BLS calculator.
These 15 communities suffer from high unemployment, stagnant incomes, high poverty, high
proportions of cost-burdened homeowners, and high vacancy rates. Except for Suffolk County, all the
municipalities have unemployment rates exceeding the national average and reaching into the mid-teens,
ranging from 10.4 percent in North Las Vegas to 17.4 percent in Wayne County (which is double the
national rate). In six municipalities, more than a fifth of all residents live below the poverty level; in
Newark, it’s more than a quarter of all residents.
Nine communities have median household incomes that are below the national median, and overall,
surrounding counties and states tend to have higher incomes (table 2). Richmond’s median income is a
third lower than that of Contra Costa County. The New Jersey median income is 50 percent higher than
median income in Irvington and 42 percent higher than in Newark. While North Las Vegas’s median
income is higher than in the state overall, this is largely because Nevada was one of the hardest-hit states
during the housing crisis: Nevada still leads the nation in foreclosure rates, has the highest proportion of
mortgaged residential properties with negative equity (45.4 percent in the first quarter of 2013), and has the
country’s highest proportion of highly leveraged homeowners (with an average loan-to-value ratio of 96
percent, versus the national average of 67.2 percent; see Choi 2013).
Using Eminent Domain to Assist Underwater Homeowners
3
We also compared the change in median household income between the 2007–11 American
Community Survey and the 2000 Census (see table 1). We adjusted the income data from 2000 for
inflation using the Bureau of Labor Statistics’ Inflation Calculator, 6 which uses the average consumer price
index for a given calendar year. Overwhelmingly, we found that, when adjusted for inflation, median
income decreased in nearly all communities examined (the exceptions were Fontana, Newark, Ontario, San
Bernardino County, and Stockton, where income remained stagnant or made modest increases). This
follows the national trend, since US median real income decreased by 4 percent between 2000 and 2011. In
Wayne County, real incomes dropped by 39 percent, and in Suffolk County, they dropped by 21 percent.
Given stagnant or declining incomes, it is unsurprising that mortgaged homeowners in the
communities examined are cost-burdened. Considering that a significant proportion of mortgaged
homeowners in the cities and counties are underwater and delinquent (table 3), these communities will
likely continue to see high foreclosure rates, even after rates in nearby areas begin to taper off. Officials in
Irvington point out that 22 percent of homes are currently in foreclosure, twice the rate for Essex County. 7
Vacancy rates can be a measure of the strength of a city’s housing market. High rental and housing
vacancy rates indicate a weakening economy (many people are moving out + few people are moving in =
an oversupply of housing), while low vacancy rates indicate an improving economy and high demand for
housing. Richmond’s overall vacancy rate is 12 percent, much higher than the county and state averages (7
and 9 percent, respectively); its homeowner and rental vacancy rates are nearly double the county and state
averages (see table 2). These heightened numbers are shared by the other communities examined: they
have a high share of vacant housing units and higher-than-ideal homeowner and rental vacancy rates. 8 In
short, these cities have a toxic combination of high unemployment and vacancy rates and high proportions
of cost-burdened homeowners.
4
Housing Finance Policy Center
Table 2. Indicators for All Eminent Domain Jurisdictions and Their Home Counties and States
Place
California
Contra Costa County
Richmond
San Bernardino County
Fontana
Ontario
Los Angeles County
El Monte
Pomona
San Joaquin County
Stockton
Monterey County
Salinas
Michigan
Wayne County
Nevada
Clark County
North Las Vegas
Illinois
Cook County
Chicago
Massachusetts
Plymouth County
Brockton
New York
Suffolk County
New Jersey
Essex County
Irvington
Newark
United States
Unemployment
rate
10.1%
9.5%
12.7%
12.9%
13.6%
13.5%
9.8%
11.4%
11.8%
14.4%
15.7%
10.8%
11.3%
12.3%
17.4%
7.0%
13.6%
10.4%
9.3%
10.8%
12%
8.1%
8.8%
13.8%
8.2%
6.4%
8.7%
11.3%
15.1%
15.7%
8.7%
Median
household
income
$61,632
$79,135
$54,554
$55,853
$64,058
$55,902
$56,266
$41,820
$50,893
$53,764
$47,365
$59,737
$50,658
$48,669
$41,886
$55,553
$64,058
$57,425
$56,676
$54,598
$47,371
$65,981
$74,698
$49,848
$56,951
$87,187
$71,180
$55,876
$41,538
$35,696
$52,762
Change in
MHI since
2000 Census*
-1%
-5%
-6%
0%
7%
1%
2%
-1%
-3%
0%
2%
-5%
-11%
-36%
-39%
-5%
-4%
-5%
-7%
-9%
-6%
0%
3%
-3%
0%
-21%
-1%
-5%
-13%
2%
-4%
Residents
living below
poverty line
14%
10%
18%
16%
14%
16%
16%
22%
19%
17%
22%
15%
20%
16%
23%
13%
13%
14%
13%
16%
21%
11%
7%
16%
15%
6%
9%
15%
19%
26%
14%
Vacant
housing
units
9%
7%
12%
14%
6%
6%
6%
5%
7%
9%
10%
10%
6%
15.6%
17.3%
15%
15%
13%
10%
11%
14%
10%
10%
9%
11%
13%
10%
12%
16%
16%
12%
Homeowner
vacancy
rate
2%
3%
5%
4%
3%
3%
2%
2%
2%
3%
4%
2%
3%
3%
4.3%
4%
5%
5%
2%
3%
4%
1%
2%
2%
2%
2%
2%
2%
7%
5%
2%
Rental
vacancy
rate
5%
6%
10%
7%
6%
6%
4%
3%
6%
6%
7%
4%
5%
9%
11%
11%
11%
9%
7%
8%
8%
5%
6%
6%
5%
6%
7%
9%
9%
11%
8%
Median
home
value
$421,600
$490,200
$352,600
$278,400
$294,800
$294,300
$478,300
$371,600
$311,300
$264,400
$222,200
$497,400
$340,600
$137,300
$110,000
$225,400
$226,200
$199,300
$198,500
$256,900
$260,800
$343,500
$350,700
$254,300
$301,000
$411,000
$349,100
$389,800
$239,800
$282,400
$186,200
Source: Change in MHI based on Census 2000; other data from 2007–11 ACS.
In table 3, which includes information from Zillow’s second quarter 2013 Negative Equity Report, we
looked at the share of mortgaged residential homes that are underwater for select cities and counties, as
well as the share of these mortgages that are delinquent. The city-level information is only available across
zip codes (Irvington has just one zip code).
Using Eminent Domain to Assist Underwater Homeowners
5
Table 3. Negative Equity Rates for Select Cities and Counties
Place
Contra Costa County
Richmond
94801
94804
94805
San Bernardino County
Fontana
92335
92336
92337
Ontario
91761
91762
91764
Los Angeles County
El Monte
91731
91732
Wayne County, MI
Essex County, NJ
Irvington, NJ
Newark, NJ
07102
07103
07104
07105
07106
07107
07108
07112
07114
Clark County, NV
North Las Vegas, NV
89030
89031
89032
89081
89084
89085
89086
United States
% of mortgaged
residential properties
that are underwater
% of these that
are delinquent
Negative equity
percentile
27%
7%
NA
44%
45%
35%
38%
7%
6%
6%
8%
Highest 5% in US
Highest 5% in US
Highest 20% in US
Highest 5% in US
38%
35%
41%
9%
10%
10%
Highest 10% in US
Highest 20% in US
Highest 10% in US
33%
34%
33%
20%
8%
7%
9%
8%
Highest 20% in US
Highest 20% in US
Highest 20% in US
NA
13%
16%
45%
27%
48%
10%
8%
6%
27%
42%
NA
NA
Highest 5% in US
Highest 20% in US
Highest 5% in US
60%
47%
54%
52%
56%
59%
59%
58%
48%
48%
53%
39%
36%
34%
31%
35%
44%
44%
48%
13%
Highest 1% in US
Highest 5% in US
Highest 5% in US
Highest 5% in US
Highest 5% in US
Highest 1% in US
Highest 1% in US
Highest 1% in US
Highest 1% in US
Highest 1% in US
72%
55%
55%
59%
51%
52%
53%
24%
18%
13%
14%
13%
11%
11%
21%
NA
Highest 1% in US
Highest 5% in US
Highest 5% in US
Highest 1% in US
Highest 5% in US
Highest 5% in US
Highest 5% in US
NA
Source: 2Q2013 Zillow Negative Equity Report.
What is most striking about the data is that while the ratio of underwater residential properties is high
across most of these municipalities, parts of New Jersey seem to suffer from particularly high risk of
foreclosure: at least a third of all underwater mortgage holders in Newark are delinquent, as are nearly half
of all underwater mortgage holders in Irvington. New Jersey’s high delinquency numbers are likely driven
in part by its significant foreclosure backlog, as deeply distressed borrowers remain in their homes much
longer than in other parts of the country. 9
We also wanted to track the changes in residential housing prices from peak to trough, trough to
recovery, and peak to recovery (see table 4). We used generally accepted time periods for the peak (2006)
6
Housing Finance Policy Center
and trough (2011–12), and used the latest data (2013) for the recovery. We looked at all the cities that have
considered the eminent domain plan, and compared the changes in housing price indices (HPI) against the
counties and states in which they reside. The data indicate that none of the municipalities have recovered
as well as the nation overall. National housing prices have dropped 19 percent between peak and recovery;
on average, across the eminent domain municipalities, housing prices have dropped by 36 percent from
peak to recovery. In North Las Vegas, housing prices have fallen by 51 percent since the peak, larger than
the fall in prices in Clark County and Nevada. In fact, based on housing price recovery from peak to
recovery, none of the cities are improving as well their home states, and nearly all of the cities are lagging
behind their counties. Even Suffolk County, which seems to be an outlier among the eminent domain
cities (it has a higher median income and lower unemployment, for example), saw a 28 percent drop in
prices between peak and trough, an 8 percent increase between trough and recovery, and a 23 percent
drop in prices between peak and recovery. In contrast, New York State saw a 16 percent drop in prices
from peak to trough, an 11 percent increase between trough and recovery, and 7 percent drop in prices
between peak and recovery. Prices in the state did not drop as much as they did in Suffolk County, and
they increased more quickly as well. In California, home prices in El Monte and Pomona are closely
aligning with county and state trends.
Using Eminent Domain to Assist Underwater Homeowners
7
Table 4. Changes in CoreLogic Housing Price Index (HPI) for All Eminent Domain Jurisdictions
and Their Home Counties and States
Place
Peak to Trough
California
Contra Costa County
Richmond
San Bernardino County
Fontana
Ontario
Los Angeles County
El Monte
Pomona
San Joaquin County
Stockton
Monterey County
Salinas
Michigan
Wayne County
Nevada
Clark County
North Las Vegas
Illinois
Cook County
Chicago
Massachusetts
Plymouth County
Brockton
New York
Suffolk County
New Jersey
Essex County
Irvington
Newark
United States
-43%
-50%
-57%
-54%
-54%
-53%
-40%
-41%
-43%
-62%
-63%
-54%
-55%
-46%
-53%
-59%
-60%
-64%
-34%
-39%
-38%
-26%
-32%
-41%
-16%
-28%
-30%
-40%
-39%
-46%
-33%
Trough to Recovery
Peak to Recovery
31%
41%
32%
27%
26%
31%
28%
26%
28%
30%
27%
37%
30%
27%
37%
35%
34%
36%
12%
14%
15%
18%
11%
14%
11%
8%
7%
15%
20%
14%
21%
-25%
-30%
-43%
-42%
-41%
-38%
-23%
-25%
-27%
-50%
-53%
-37%
-41%
-31%
-36%
-44%
-46%
-51%
-26%
-30%
-29%
-12%
-24%
-32%
-7%
-23%
-25%
-30%
-27%
-39%
-19%
Source: CoreLogic HPI data.
Note: CoreLogic HPI is collected at the zip code level for the cities, weighted by the 2010 Census population numbers, and
includes single-family attached and detached homes.
All of which is to say that the cities and counties that have considered eminent domain are, in essence,
pockets of distress left behind as the tide of the recession gradually pulls back.
Richmond’s Situation
A deeper dive into the Richmond numbers reveals a city that is struggling. Many homes have lost more
than half their value since the housing crash: according to CoreLogic’s HPI, housing prices in Richmond
dropped 57 percent from peak to trough, 32 percent from trough to recovery, and 43 percent from peak
to now. As a result of the drop in home values, many residents have found themselves underwater on their
loans. Richmond officials assert that the average underwater homeowner in Richmond owes 45 percent or
more on his or her mortgage than the underlying house is currently worth; this difference has resulted in a
large number of foreclosures and may contribute to more in the future (Lindsay 2013). According to City
Manager William Lindsay, there have been 2,000 foreclosures over the past three years, affecting 16
8
Housing Finance Policy Center
percent of Richmond’s mortgaged homeowners. In comparison, the state foreclosure rate over the past
three years has been 6 percent, less than half of Richmond’s rate (Lindsay 2013).
The city also claims, not surprisingly, that the drop in housing values has had community-level
impacts, as foreclosures have resulted in vacant and abandoned properties that further depress neighboring
property values. Mr. Lindsay reports that property tax revenues declined 14.5 percent between 2007 and
2012, hindering the city’s ability to provide services to residents and leading to a nearly 20 percent staff
reduction during the same period (Lindsay 2013).
The city argues that these challenges, and insufficient outside assistance to help address them, have left
it little choice but to pursue local interventions. Richmond officials explored several policy solutions and,
ultimately, pursued the eminent domain plan by partnering with Mortgage Resolution Partners (MRP), a
San Francisco–based firm.
Richmond calls its plan Richmond CARES (Community Action to Restore Equity and Sanity). As
proposed, the city plans to assist underwater homeowners who are at risk of default. It would do so by
offering to purchase the loans at current fair market value from investors who hold the mortgages. These
investors would suffer a loss on the nominal loan balance but would, in theory, be shielded from a
potentially more costly default. The loans would be financed through funding from MRP’s investors, and
MRP would modify the principal to more affordable terms through the FHA’s Short Refinance Program
(SRP). 10
Assume an underwater borrower purchased a home for $400,000 and still owes $300,000, though the
home has a current assessed value of $200,000. With financing from MRP, the city would purchase the
loan for 80 percent of the fair market value ($160,000). The loan would then be transferred to MRP for
servicing, and MRP would help the homeowner refinance the loan for $195,500 (since the FHA SRP
requires that the LTV not exceed 97.75 percent, the new loan would be $195,500, or $200,000 × 0.9975),
with $5,000 of the proceeds held by the FHA for the initial loan insurance premium. Fees to fund city staff
and MRP’s expenses would come from the difference between the refinance proceeds and the loan cost
($190,500 − $160,000 = $30,500). MRP would receive a $4,500 servicing fee per successful transaction,
and the rest of the proceeds would go to MRP’s funders and the city.
Why Is the Plan Controversial?
This transaction has generated several points of controversy. Seizure of property through eminent domain
requires that the taking must be for a public use and the property owner (in this case, the owner of the
Using Eminent Domain to Assist Underwater Homeowners
9
loan) must receive just compensation, which means fair market value. Critics of Richmond’s considered
action claim that neither of these requirements is met.
Public Purpose
Richmond’s eminent domain plan targets 624 loans. A look at the characteristics of these loans raises
questions about whether their seizure and refinancing will meet Richmond’s community stabilization
objectives. Phillip R. Burnaman, an investment banker who analyzed the target loans for the plaintiffs in
the trustees’ suit, testified that nearly a third (31 percent) of the target loans have LTVs below 100 percent,
meaning they are not underwater. Reportedly, 70 percent, or 444, of the target loans are performing,
meaning these homeowners are current on their payments and unlikely to default, though MRP disputes
these numbers (Burnaman 2013). It could be argued that focusing on performing underwater homeowners
is an attempt to target people who have been making an honest effort to stay current on their loans, rather
than walk away, and that some of these people may be under significant financial stress that could lead
them to stop paying. Still, there are concerns that the plan, as proposed, might skip over the homeowners
most in need of assistance.
Mr. Burnaman further testified that over half (53 percent) of the target loans had received loan
modifications—30 percent received permanent principal reductions. For the loans receiving principal
reductions, 67 percent transitioned to positive equity after modification, and the average LTV shifted from
160 percent to 96 percent (table 5). Across all modified target mortgages, the average monthly payment
reduction was $897, or 38 percent of the original mortgage payment amount.
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Housing Finance Policy Center
Table 5. Modifications to Richmond’s Target Loans by Modification Type
Number of loans
Current balance
Current LTV
Total amount capitalized
Total amount forgiven
Average rate reduction
Average payment before modification
Average payment after modification
Average payment reduction ($)
Average payment reduction (%)
Capitalization
Principal forgiveness
Interest rate
41
$16,436,135
129
4,403,761
NA
NA
$2,044
$1,543
$501
25%
91
$37,199,510
96
NA
$13,428,566
NA
$2,034
$1,350
$684
34%
223
$94,835,141
124
NA
NA
4.05
$2,540
$1,484
$1,056
42%
Source: Greensledge Group, based on CoreLogic data (Burnaman 2013)
The plaintiffs also assert that a quarter of targeted loans have perfect pay histories (never missed a
payment); 9 percent of the loans have been current for all but one or two months; and 46 percent have
had perfect pay histories for the past two years (Burnaman 2013). This is noteworthy, since payment
history is an important factor in mortgage portfolio risk analysis, and the loans targeted by Richmond
reflect a strong commitment on the part of borrowers to stay in their homes. While the intent may be to
reward committed borrowers, nonperforming homeowners who are at more serious risk of default will not
be helped by Richmond CARES.
MRP and Richmond argue that final decisions on loans that receive purchase offers will not be made
until transactions are finalized; so far, the city has simply sent letters to loan servicers. To date, the
mortgage seizure strategy remains a plan; it has not actually been executed. The city also points out that its
program is not designed to simply assist select individual homeowners but has a broader, more important
goal of ensuring the safety and soundness of the entire community. It points to places such as Detroit,
where individual foreclosures contributed to a landslide of vacant housing units that reduced neighboring
property values and played a role in the city’s bankruptcy.
Just Compensation
As mentioned, the government is required by law to provide owners of property seized by eminent
domain with just compensation, which courts have traditionally interpreted as fair market value. Under
Richmond CARES, mortgage note holders will be paid 80 percent of the home’s currently assessed fair
market value. MRP asserts that the 80 percent value builds in the cost of a potential default, but this
pricing assumes that the properties have a 100 percent chance of default. Also, because so many of the
loans are performing, it could be argued that the valuation should consider the future cash streams that
may be generated by loan interest. MRP states that any speculation about the ultimate purchase price is
premature, since the city, MRP, and loan holders have not negotiated offer prices.
Using Eminent Domain to Assist Underwater Homeowners
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The lack of negotiations has a lot to do with the nature of the loans targeted. Richmond is targeting
loans in private-label mortgage-backed securities (PLS) and excluding loans guaranteed by the GSEs. This
decision is likely based on the institutional and contractual structure of PLS, which MRP says impedes loan
modifications. The rights and obligations of originators, subsidiaries, trustees, servicers, and investors in
PLS are spelled out in the pooling and servicing agreement (PSA). While trustees are the logical advocates
for investors, their obligations under traditional PSAs have typically been administrative. In Richmond’s
case, critics argue that the PLS structure lacks an effective mechanism by which investors or their agents
can advocate for a fair market value. Many have argued that this underscores the need for broad
securitization reform (Goodman et al. 2012).
Impact on the Broader Markets
One criticism of the plan is that it interferes with the contractual obligation between lenders and
borrowers, and does not hold irresponsible homeowners accountable for borrowing more than they could
afford. And while some investors may agree that, before the crash, some irresponsible lenders pushed
high-interest, subprime loans on both unqualified borrowers and those that qualified for conventional
loans, they say that does not justify disregarding the rights of investors.
Richmond CARES may have repercussions that extend beyond Richmond and harm the broader
securities and housing markets. One consequence could be higher mortgage interest rates, as lenders riskadjust to compensate for future potential seizures, and larger down payment requirements, to provide a
buffer against losses in the event of a seizure. Lenders and the FHFA have indicated they will reduce
lending and credit access in areas that use eminent domain to seize mortgages, and they have advised
associates to do the same. Fair housing advocates argue that this is equivalent to the practice of
“redlining,” given that many communities considering eminent domain have high concentrations of lowincome, minority populations. California Lieutenant Governor Newsom asserts that advising others to
stop lending in certain areas would violate anti-collusion laws. 11
The plan could also hurt pension funds that own pieces of the affected mortgages: Recently, the
nation’s largest public pension fund, California Public Employees’ Retirement System (Calpers), expressed
concerns about the eminent domain strategy. 12 At the same time, the Service Employees Union (SEIU),
which represents 452 of Richmond’s 900 public employees, most of whom are members of Calpers, has
fully endorsed the eminent domain plan. 13
It’s worth noting that some critics of the eminent domain plan initially endorsed the idea of purchasing
and modifying underwater mortgages. In 2008, ASF’s Tom Deutsch testified before the House Committee
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Housing Finance Policy Center
on Financial Services “that the seismic economic challenges in the United States…are too great for purely
private sector loan modification solutions” and “expanded government programs may be effective in
bridging this gap…[since] foreclosures are bad for everyone” (Deutsch 2008, 5). He went on to suggest
that “TARP could purchase individual distressed loans out of MBS trusts,” and that ASF “has recently
undertaken a review of the various opportunities and obstacles for servicers to sell below par individual
distressed loans out of MBS to the TARP.” Similarly, SIFMA’s Tim Ryan stated that “Treasury is uniquely
positioned” to intervene and bring buyers and sellers together. 14
Of course, these statements were made in 2008, at the height of the crisis and during TARP
negotiations, when there was much concern that the housing market would go over the cliff and tank the
rest of the economy. Deutsch and others assert that they were supporting a one-time massive, systematic
government purchase of distressed loans (i.e., loans in default or about to default) out of PLS trusts as a
loss-mitigation strategy. Underwater loans that have a perfect or near-perfect pay history would not have
qualified for this massive undertaking.
Existing Efforts Have Not Gone as Far as Needed
The Obama administration, the states, and even lenders have taken steps to assist borrowers who have
struggled to make their mortgage payments. Even in the aggregate, however, these efforts have fallen short
of addressing the level of distress suffered by homeowners in many of the hardest hit communities. The
Home Affordable Modification Program (HAMP), in some ways the administration’s most ambitious
effort, is a useful case in point. Designed to incentivize lenders to modify the loans of struggling
borrowers, it has led to 1.2 million modifications within the program and another 6.7 million modifications
in proprietary programs based on HAMP. 15 But this number should be put in the context of the 2.6
million borrowers who currently are more than 90 days delinquent on their loan payments or are entering
foreclosure, 16 and the 6.7 million liquidations (foreclosures and short sales) since 2007. 17 The Hardest Hit
Fund (HHF), another administration program, was designed to provide $7.6 billion of direct funding to
states suffering the most acute distress as a result of the housing crisis. This will help relieve distress in
many of the hardest hit communities, but as of March 2013, only $1.3 billion has been spent locally to
assist 109,874 homeowners; the amount of money that has found its way into these communities pales in
comparison to the levels of distress they face (SIGTARP 2013).
Other assistance efforts also have fallen short of need. In Oakland, just a few miles from Richmond,
the Community Housing Development Corporation launched Restoring Ownership Opportunities
Together (ROOT), a pilot program to purchase distressed properties from lenders and resell the homes to
Using Eminent Domain to Assist Underwater Homeowners
13
existing owners with restructured mortgages reflecting current market value. ROOT is inspired by the
Stabilizing Urban Neighborhoods (SUN) initiative, which was developed by Boston Community Capital
(BCC). Under SUN, BCC negotiates the acquisition of properties that have been foreclosed (but from
which the occupants have not yet been evicted), and resells the home to the original homeowner so the
person does not have to leave. The model, however, works best when there is a significant difference
between the estimated current value of the house and the mortgage; as the market recovers, this gap has
become smaller. Similarly, as the market has picked up, nonprofits that initially had little trouble acquiring
real-estate-owned (REO) and vacant properties for resale must now compete with institutional investors
and individuals purchasing properties with the intent to rent them.
Conclusion
In this issue brief, we examined commonalities among jurisdictions considering the eminent domain plan,
comparing them to each other, as well as to the counties and states where they are located. We laid out the
controversy over Richmond’s eminent domain plan, highlighting potential issues and the reasons
municipalities are turning to home-grown solutions. The negative indicators shared by municipalities that
have considered the eminent domain solution (e.g., high unemployment, low incomes, high proportions of
underwater homeowners, slower HPI recovery, etc.) indicate that their shared problems extend beyond
housing. These cities have traditionally suffered from lack of investment, high crime rates, concentrated
poverty, and other general barriers to opportunity. These factors contributed to their poor performance
during and after the housing crash, and the relief efforts to date, both from lenders and policymakers, have
been modest relative to the scale of the problem.
Yet it is unclear that seizing loans through eminent domain will produce the desired outcomes:
preventing foreclosures and, thus, ensuring that the community fabric and the municipality’s economy
remain intact. For example, Richmond is targeting performing loans in PLS, and while the eminent domain
plan is designed to help underwater mortgage holders, investors assert that nearly a third of target loans are
above water. In contrast, a much wider universe of nonperforming, underwater loans is in private-label
and agency securities that are, arguably, at more immediate risk of default. Additionally, implementing
eminent domain will likely have repercussions in the housing finance markets that will lead to higher
interest rates and down payments.
There do appear to be some less disruptive alternatives on the table. For one, recent reforms to the
distribution of HHF will improve coordination between local agencies and federal and state funds. State
housing finance agencies, which administer HHF, are trying to ensure that help goes to the most distressed
borrowers. In Illinois and Ohio, the Mortgage Resolution Fund (MRF, unaffiliated with MRP), a
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Housing Finance Policy Center
partnership founded by four national housing nonprofits, prevents foreclosures by purchasing bundles of
delinquent mortgage notes and working with homeowners to modify the loans. Illinois provided MRF
with $100 million from its HHF for loan purchases and $40 million as a no-interest, no-fee loan; Ohio
created a $30 million program to support the purchase of notes by nonprofits, from which MRF has
drawn $15 million. 18 Crucially, in both states, MRF is working with local entities active in foreclosure
prevention and neighborhood stabilization to develop city-specific assistance programs. While the program
has experienced some bumps in the road (fragmented local lending landscapes, reluctance to sell notes at
current value, lack of interest from the GSEs and large commercial players), MRF managed to purchase
more than 1,000 delinquent mortgages between 2011 and 2013. California’s own HHF program, Keep
Your Home California, has launched an aggressive effort to reach more distressed homeowners.
Other assistance programs directly target nonperforming underwater loans, which have a higher
chance of default than performing underwater loans. After rejecting the eminent domain plan, San
Bernardino County partnered with four nonprofits to assist underwater homeowners through four
programs. 19 One program involves purchasing distressed loans through short sales, and then leasing the
homes back to the homeowners, setting terms for future repurchase. Another program will acquire
nonperforming loans and offer loan modifications to reduce outstanding principal. A third program will
acquire nonperforming FHA-insured loans, while a fourth program will also offer a short-sale lease option
and a loan-modification program in which nonperforming loans will be acquired from lenders and
modified so homeowners can remain in their homes with affordable payments. All of these programs
target nonperforming underwater borrowers.
Many critics of Richmond’s program point out that the city’s problems would best be resolved
federally. This seems to be the one point that Richmond officials, MRP, and eminent domain critics agree
on. So far, however, federal (and other) solutions have been less than needed for these communities to
turn the corner for recovery. And while changes are set to occur, until places like Richmond do begin to
turn that corner, they will likely press to use the best tools they have to deal with the lingering effects of
the foreclosure crisis.
Using Eminent Domain to Assist Underwater Homeowners
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References
Burnaman, Phillip R. 2013. “Reply declaration of Phillip R. Burnaman, II,” in Wells Fargo Bank, National
Association, as Trustee, Et Al. v. City of Richmond, California and Mortgage Resolution Partners LLC,
Aug. www.ropesgray.com/news-and-insights/news/2013/08/~/media/Files/articles/domain/ReplyDeclaration-of-Phillip-R-Burnaman-ii.ashx.
Choi, Laura. 2013. “Housing Market Recovery in the 12th District: Implications for Low- and Moderate-Income
Communities.” San Francisco, CA: Federal Reserve Bank of San Francisco. www.frbsf.org/communitydevelopment/publications/community-development-research-briefs/2013/august/housing-marketrecovery-impact-low-moderate-income/.
Deutsch, Tom. 2008. “Statement of Tom Deutsch, Deputy Executive Director, American Securitization Forum
before the Committee on Financial Services, US House of Representatives.” Hearing on Private Sector
Cooperation with Mortgage Modifications – Ensuring that Investors, Servicers and Lenders Provide Real Help for Troubled
Homeowners, November 12. http://archives.financialservices.house.gov/hearing110/deutsch_-_asf.pdf.
Goodman, Laurie, Ashworth, R., Landy, B., and Yang, L. 2012. “Creative Uses of Eminent Domain – Implications
for PLS Trusts,” Amherst Mortgage Insight, Amherst Securities Group, June 28.
Lindsay, William. 2013. “Declaration of William Lindsay in support of opposition to preliminary injunction,” in
Wells Fargo Bank, National Association, as Trustee, et al. v. City of Richmond, California and Mortgage
Resolution Partners LLC, September 13.
http://issuu.com/fitzthereporter/docs/complaint_august_7__2013/1?e=6767291/4716981
McCoy, Patricia A. 2010. “Barriers to Federal Home Mortgage Modification Efforts during the Financial Crisis.”
Paper presented at Moving Forward: The Future of Consumer Credit and Mortgage Finance, Harvard Business
School, Boston, Feb 18–19. http://www.jchs.harvard.edu/sites/jchs.harvard.edu/files/mf10-6.pdf
Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP). 2013.
Quarterly Report to Congress, July 24, 2013. Washington, DC: SIGTARP.
www.sigtarp.gov/Quarterly%20Reports/July_24_2013_Report_to_Congress.pdf.
Pollard, Alfred M. 2013. “Summary of Comments and Additional Analysis Regarding Input on Use of Eminent
Domain to Restructure Mortgages.” General Counsel Memorandum of the Federal Housing Finance
Agency (FHFA), August 7. Washington, DC: FHFA.
www.fhfa.gov/webfiles/25418/GCMemorandumEminentDomain.pdf.
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Housing Finance Policy Center
Notes
An underwater mortgage is one in which the unpaid balance of the loan is larger than the home’s current assessed market
value.
2 Robert Hockett of Cornell University School of Law, Lauren Willis of Loyola University, and Howell Jackson of Harvard
University Law School.
3 Pacific Investment Management Co., Blackrock, DoubleLine Capital, and Fannie Mae and Freddie Mac.
4 Federal Housing Finance Agency, “FHFA Statement on Eminent Domain,” FHFA press release, August 8, 2013,
www.fhfa.gov/webfiles/25419/FHFAStmtEminentDomain080813.pdf.
5 “RealtyTrac Housing MRI Identifies Markets Leading and Lagging Housing Recovery,” Foreclosure Market Report,
RealtyTrac, August 19, 2013, www.realtytrac.com/content/press-releases/realtytrac-housing-market-recovery-index-identifiesmarkets-leading-and-lagging-the-housing-recovery--7839.
6 http://www.bls.gov/data/inflation_calculator.htm.
7 Joe Tyrell, “NJ Cities Mull Unusual Step to Help Offset Lower Home Values, High Mortgages,” NJ Spotlight, August 8, 2013,
www.njspotlight.com/stories/13/08/07/nj-cities-consider-unusual-step-to-help-homeowners-with-lower-values-highmortgages.
8 Research suggests that a 2 percent housing vacancy rate and 5 percent rental vacancy rate represent rates at which home prices
and rent prices rise about the same rate as overall consumer prices. At rates above these, prices and rents tend to decline, while
at rates below, prices and rents tend to increase (Barry Bluestone, e-mail message to the author, June 25, 2011).
9 New Jersey, a judicial foreclosure state has the second-longest foreclosure timeline in the nation, behind New York. A backlog
of foreclosures is likely responsible for a high proportion of foreclosures (RealtyTrac reports that 75 percent of new
foreclosures in New Jersey are for loans originated between 2003 and 2008. If New Jersey had a nonjudicial foreclosure process,
then it would likely have far fewer houses that are delinquent but not foreclosed on [Mike Schneider, “After a Backlog,
Foreclosures Could be Slowing in New Jersey,” NJ Today, April 17, 2013, http://www.njtvonline.org/njtoday/video/after-abacklog-foreclosures-could-be-slowing-in-new-jersey/].)
10 Developed in 2010, this program is voluntary and requires the cooperation of all lien holders to work; it is only available to
non-FHA borrowers who are underwater, current, meet credit standards, and can negotiate with their lenders to reduce the
LTV to 97.75 percent.
11 Gavin Newsom, A letter from California Lieutenant Governor Gavin Newsom to US Attorney General Eric Holder and
Department of Justice Acting Assistant Attorney General Joseph Wayland,” September 10, 2012,
www.ltg.ca.gov/09102012_LTG_DOJ_LETTER.pdf.
12 Jim Christie, “Calpers Concerned about Richmond, Calif.’s Mortgage Plan,” Reuters, September 30, 2013,
www.reuters.com/article/2013/09/30/richmond-eminentdomain-calpers-idUSL2N0HM2G920130930.
13Avril Smith, “SEIU Calls on PIMCO and Blackrock to Negotiate with Richmond over Underwater Mortgages,” SEIU press
release, October 8, 2013, www.seiu.org/2013/10/seiu-calls-on-pimco-and-blackrock-to-negotiate-wit.php.
14 Travis Larson, “Treasury’s De-emphasis of Asset Purchases through TARP Disappoints, but Securitization Focus Is
Welcomed,” SIFMA press release, November 12, 2008, www.sifma.org/news/news.aspx?id=8912.
15 Urban Institute Housing Finance Policy Center (HFPC), “Housing Finance at a Glance: A Monthly Chartbook,” October
2013, Washington, DC: The Urban Institute.
16 CoreLogic, “National Foreclosure Report,” April 2013, www.corelogic.com/research/foreclosure-report/nationalforeclosure-report-april-2013.pdf.
17 Urban Institute HFPC, 2013.
18 Sophie Quinton, "The Surprisingly Simple Solution to Underwater Mortgages,” National Journal, July 25, 2013,
www.nationaljournal.com/next-economy/solutions-bank/the-surprisingly-simple-solution-to-underwater-mortgages-20130725.
19 Joe Nelson, “4 groups will offer aid with mortgages in San Bernardino County,” San Bernardino Sun, June 22, 2013,
www.sbsun.com/general-news/20130623/4-groups-will-offer-aid-with-mortgages-in-san-bernardino-county.
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