Richmond, California’s use of eminent domain continues to move forward. As regular readers know, the entire plan is a fraud intended to rip off investors so that Mortgage Resolution Partner (MRP), the firm supplying the capital to Richmond, can profit. Why Richmond agreed to take MRP up on it’s ridiculous plan has been unknown for a while now. Maybe they really don’t understand it. Maybe there is corruption involved. It’s unclear.
What is clear though is that the ultimate losers from this play will be Richmond residents. Investors are (rightfully) infuriated by Richmond’s decision to move forward with eminent domain and have filed a lawsuit attempting to block the plan. A judge threw out that suit, saying it was “premature,” but the legal battles are just beginning. Once the city does seize the mortgages, investors will file suit again. Hopefully a judge immediately sees through this highway robbery and isn’t fooled as well. This entire thing is an unnecessary and costly waste of time.
In the end though, investors will be okay here. MRP’s plan will fail. The losers will be Richmond residents, which Moody’s made clear last Friday. The credit rating agency named the plan “credit negative.” From the report:
The eminent domain program is credit negative for the city because it will likely lead banks to raise mortgage interest rates and reduce mortgage availability, which will in turn limit the growth of property values and related taxes
Lenders will factor in the additional risk by raising mortgage interest rates or decreasing their availability
None of this is surprising, but it’s still sad to hear.
If this plan was done properly, Richmond would offer up a fair value to investors. Some of those investors may disagree with Richmond’s valuation. There would be quibbling and the two sides could look to work out a fair deal. Some banks may be wary of the additional risk and factor it into higher rates, but the rise would be small. If investors are properly compensated, they won’t be too upset to offload defaulted, underwater mortgages. They may not even put up much of a fight. In the end, mortgage rates wouldn’t rise much, if at all. But MRP’s plan is such a ripoff that if it were to go through, banks would jack up rates. Luckily that won’t happen, but it shows what a mess this entire situation is. MRP’s plan is a fraud, Richmond fell for it and its residents pay the price.
Last night, Richmond, California’s city council approved the plan to use eminent domain to help underwater borrowers by a vote of 4-3. The plan is pure fraud. Mortgage Resolution Partners (MRP), an advisory firm, rounded up investors to supply capital to Richmond so that it could purchase the mortgages of underwater borrowers in the area. The city would then right down the value of the loan so that the borrowers could refinance at a lower rate. However, MRP wasn’t just helping out the city. It was looking to make a profit. And how was it doing that? By paying investors well below fair market value for the loans.
I’ve said repeatedly that I have no idea how Richmond fell for this plan. These two tweets from Wonkblog’s Lydia DePillis, who was at the meeting, may explain it a bit:
A dysfunctional city council that doesn’t understand what they’re voting on is about the best explanation I’ve heard for why the city is implementing MRP’s plan. Still, I was hoping someone would talk some sense into the council members and explain to them why this is such a bad idea. Unfortunately, that hasn’t happened.
Not much has happened in the past couple of weeks with Richmond, California’s use of eminent domain to help underwater borrowers. As I’ve said a couple of times, this is just a big scam by the firm supplying the capital, Mortgage Resolution Partners (MRP), and Richmond fell for it. It’s come out recently that the borrowers of the mortgages MRP is looking to seize are current on their payments. Banks and investors, not surprisingly, have no interest in giving these up and have filed a lawsuit to stop the plan. MRP pushed back with a ridiculous argument:
[MRP Chief Strategy Officer John] Vlahoplus, of Mortgage Resolution Partners, disputed the analysis, saying he’s confident that all of the 624 borrowers are indeed underwater. The city’s appraisals of the properties, he said, were handled by a firm whose work has been highly rated by securities trade groups.
About two-thirds of the borrowers have indeed stayed current on their loans, he said. But helping them now — before they default — is the best way to make sure they stay current on the loans and thereby limit further damage to Richmond’s battered neighborhoods.
“The intent here is to help the neighbors,” he said.
This is absurd. All of these mortgages were created before 2008, meaning that two-thirds of these borrowers have weathered the Great Recession and are still making on-time payments. These are performing loans. Investors love them. And now MRP is coming in and seizing them at well-below fair value to prevent them from defaulting in the future. After the economic disaster of the past six years, what are the odds that now these homeowners are going to default with the economy improving? Very low. And MRP is doing all of this is to help the neighbors!
Give me a break. The brashness of this argument is truly astounding. I have no idea how Richmond fell for it and I can’t imagine that any judge will as well. And it still overshadows the fact that eminent domain really could be a powerful tool to help underwater borrowers. What a shame.