The San Francisco Chronicle reports that the Bay Area city of Richmond is implementing a new idea for helping homeowners struggling to pay their mortgages. Not only is this an unnecessary project that appears to be ignoring the true source of Richmond's economic trouble, but it is crony capitalism pure and simple.
Under the plan, promoted by financial industry startup Mortgage Resolution Partners, the city is threatening to use its power of eminent domain to take over underwater properties. Richmond would pay the mortgage lenders -- typically participants in Mortgage Backed Securities -- 80% of the current market value of the home, using the rest to cover costs and pay Mortgage Resolution Partners its fee of $4500 per condemned property. Homeowners will receive a new taxpayer-subsidized FHA mortgage based on the new valuation.
Given the rebound in home prices, one wonders if this isn't a policy idea whose time has come and gone. The most recent Case Schiller index shows San Francisco metropolitan area home prices up 24% over the last year and 43% above their trough in 2009, so clearly the problem of underwater mortgages is solving itself.
According to one Richmond homeowner who stands to benefit from the city’s land grab, the rebound has yet to benefit him. But, according to Zillow, price in Richmond have risen almost 23% in the past year - not far below the metropolitan area average. It is worth noting, however, that Richmond is underperforming neighboring communities like Albany (up 29%) and El Cerrito (up 26%). Further, average home prices in Richmond ($205.7k) are far lower than those in El Cerrito ($604.1k), despite the fact that both cities belong to the same school district.
Although a lot of factors drive home price levels and movements, we are left to wonder whether Richmond's relatively high crime rate is a contributing factor. Perhaps if city officials focused more attention on catching thieves than on stealing houses, mortgagees would be in better shape. Ironically, this eminent domain idea might make things worse. A second order problem with the initiative is that, by creating uncertainty on the part of mortgage lenders, it will further depress home prices, thereby reducing Richmond's property tax collections and its ability to pay for police.
This is not the first time a California municipality has considered using eminent domain to sieze property under dubious pretense. Last year, Reason's Anthony Randazzo wrote for RealClearMarkets that San Bernardino County's pursuit of the idea "would create a highly complex, legal nightmare worse than the foreclosure mess, and take years, if not decades, to process through the court system."
And, the same company -- Mortgage Resolution Partners -- was behind trying to get San Bernardino to pursue eminent domain. They have presented this idea to municipalities as a means of solving an economic problem, and then conviniently been the only firm available for the municipality to hire. They are colluding to drum up business for which they will gain a benefit in the marketplace unavailable to any others in the mortgage and legal industires. That is crony capitalism 101.
While eminent domain advocates present this idea as a way for Main Street to get back at Wall Street, the truth is more complicated. Investment banks profited from these mortgages years ago, racking up hefty fees when the securities were packaged and sold. The real losers from Richmond's cramdown will be whoever currently owns securities backed by these mortgages. Many MBS are in the hands of hedge funds speculating on the housing market bounce back, but public employee pension funds are also major holders. For example, CalPERS held over $12 billion in MBS as of last June - probably including positions in a number of deals that would be affected by Richmond's action.
Richmond, California is a city with many challenges. Local leaders and most of their constituents would be best served by passing on Mortgage Resolution Partners's eminent domain scheme.