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.