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Can “underwater mortgages” be acquired by municipalities using Eminent Domain power?

September 3, 2013 by Daniel G. Leave a Comment

underwater mortgagesFaced with hundreds of homes that have been abandoned by “underwater” owners, the City of Richmond, California, has proposed to purchase 624 loans secured by those properties, and has threatened note holders who resist selling with seizure of their loans.

The City argues that these loans are only worth the current value of the underlying real estate. The City proposes to acquire these loans for, in some cases, as much as a 50% discount on their face amount. The plan is to offer owners who stay in their homes a chance to get a City-financed mortgage loan for just less than the home’s fair market value (e.g., $240,000 for a house worth $250,000). In this example, the city would offer to buy the loan for $200,000 and would compel the sale at a reduced rate, at the expense of the current mortgage holder. The additional sum realized from the refinance ($40,000 in this example) would fund the program, and provide profits to those providing seed capital.

The action has already prompted a lawsuit (Wells Fargo Bank, N.A., et al. v. City of Richmond, California, et al. [need case number and court if you have it, otherwise, drop the parenthetical identifying the case name]), which is not surprising considering the potential losses to the current mortgage holders. Opponents also argue that this practice, if it becomes more popular, could reduce access to mortgage capital in areas with volatile real estate markets. Further, the Federal Housing Finance Agency has weighed in (August 6, 2013) with a statement that such use of eminent domain, “…presents a clear threat to the safe and sound operations of the entities under its purview.”

It will be a closely-watched case.

Filed Under: underwater mortgages

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Mr. Gonzales is in private practice, providing representation, advice and counsel in complex real estate, corporate, and business transactions on behalf of public and private institutions, businesses, and individuals.

This material has been prepared by Daniel S. Gonzales for informational purposes only and does not constitute advertising, a solicitation, or legal advice. Neither delivery nor transmission of this material or the information contained herein is intended to create, and receipt thereof does not constitute formation of, an attorney-client relationship. The reader should not rely upon this information for any purpose without seeking legal advice from a licensed attorney. The information contained in this material is provided only as general information and is not promised or guaranteed to be correct or complete. Daniel S. Gonzales expressly disclaims all liability in respect to actions taken or not taken based on any or all the contents of this material.

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