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.
It’s a slow news day so I’m going to return to my favorite pet subject: the use of eminent domain to help underwater homeowners. As regular readers know, I believe eminent domain could be used to help such borrowers, but the current plan being implemented in Richmond, California is outright fraud. Most analyses of it that I’ve seen have come to a similar conclusion, but University of Georgia Professor Stephen Mihm wrote a defense of the proposal last week. The piece is actually very good – particularly the history of the use of eminent domain to seize intangible assets (like mortgages). But Mihm misses the reason why Richmond’s plan is such a rip off. He writes:
Richmond’s plan is to seize 624 mortgages valued at more than the homes for which they were written. Relying on a private intermediary, the city would compensate the investor holding a mortgage at a price reflecting the home’s current value rather than an inflated bubble value.
This is the problem. Investors don’t own these homes – they own the mortgage-backed securities associated with him. Those MBS are not worth what the value of the home is. They are worth a certain amount depending on the future stream of payments from the mortgage, the initial par value of the loan, the current value of the home and the likelihood that the borrower defaults. In fact, the worst case scenario for investors is that the homeowner defaults immediately, they foreclose on the home and they only recoup the current value of the home. Thus, the minimum value of the MBS is the current home value. The actual value of the MBS is well above that. Yet, Mihm is arguing that paying those investors the current value of the home is fair value. It’s not at all.
Mihm concludes his piece by saying:
Yet to listen to the hysterical denunciations of the Richmond plan, a proposal to bring 624 mortgages in line with market prices is the epitome of eminent domain abuse. History suggests otherwise.
It may not be the greatest abuse of eminent domain, but it certainly is abuse. The private firm supplying the capital to purchase the securities – Mortgage Resolution Partners (MRP) – makes a tidy profit by buying the securities as well-below fair value. That’s the definition of abuse.
What makes this even worse is that eminent domain could be used to help those borrowers. Richmond would have to pay investors fair value for their investments – and they probably would still file lawsuits against the town – but the plan could work. Unfortunately, using eminent domain in this fraudulent manner prevents it from ever taking off in a legitimate one.
Let the lawsuits begin.
I wrote last week about Richmond, CA had been duped by Mortgage Resolution Partners (MRP) into using eminent domain to “help” underwater borrowers refinance their homes through principal reduction. MRP supplied capital to the city so that it could purchase the mortgages from investors. Except MRP refused to pay more than 85% of the value of the home. For borrowers who were current on their mortgages, this was a blatant rip off. The value of those mortgages would likely be worth more than 85% the value of the original loan, significantly more than the value of the home. The question was: Were borrowers who are current on their loan part of Richmond’s plan?
The answer is a resounding yes and now investors have filed suit against the city:
The initiative has targeted mainly the loans of borrowers who are current on their payments, which make up 444 of the initial batch in Richmond, where the city council still hasn’t formally authorized the use of eminent domain. Mayor McLaughlin vowed to take the step on a July 30 call with reporters.
Richmond is going after 624 loans, of which more than 70% are held by borrowers current on their mortgages! This is an absurd rip off for investors, who are claiming they’ll lose $200 million under the plan. I’m not sure if that $200 million figure is right, but investors certainly will lose a huge amount of money. I can’t see how any judge will be fooled into thinking this is the “market value” of the loans. I’m pretty shocked that Richmond fell for MRP’s idea. This is just so blatantly illegal. It’s fraud. Yves Smith has more here, but all you have to know is that MRP is using Richmond to defraud investors and the city will ultimately pay the price.