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.
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.