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Advisory Firm in Tow, Richmond Becomes First CA City to Stand Up to Big Bank Foreclosures

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For the past few years, representatives of Mortgage Resolution Partners (MRP) have been traveling through California proposing a plan to help cities that are still dealing with the effects of the foreclosure crisis to use eminent domain to get rid of underwater mortgages.  Along the way, many towns, though interested, have succumbed to the threats of the Securities Industry and Financial Markets Association warning that any attempt to use eminent domain loans would “face a crippling legal battle as well as a ‘chilling effect’ as banks hike interest rates or pull up stakes entirely.”  

But not every town is cowering in the face of ruthlessness. The the seven-member City Council of Richmond, CA voted 4-3 to move forward with the plan proposed by MRP on Wednesday, making them the first town to do so.

After the vote, Richmond Mayor Gayle McLaughlin, who authored the council resolution in favor of the plan, told the press:

“Many in our community have been targeted by predatory loans, too many have already lost their homes, and all of the city of Richmond has suffered,”

MRP, an advisory firm run by a politically connected group of investors, has a plan similar to the bottom up strategy to fight the foreclosure crisis originally endorsed by the Obama Administration.  Richmond, with a population just over 100,000, will become the test case to see what happens when a powerful advisory firm is pitted against the big banks that helped cause the foreclosure crisis in the first place.  With no help coming from the state or federal government, the city decided to try something new because inaction was no longer a viable option.  Josh Harkinson of Mother Jones, who has been following the story, provides some detail about MRP and their business model:

The eminent domain plan was the brainchild of Robert Hockett, a Cornell law professor who specializes in the securitized mortgage market. Hockett originally wanted the government to use its power of eminent domain along with money from the Troubled Asset Relief Program to go after underwater mortgages owned by private investors—namely, the so-called private-label securities that own 10 percent of all mortgages but account for a third of all foreclosures. Hockett describes them as “suicide pacts” because they were devised without any way for their owners to modify the underlying loans. “After it became apparent that the feds weren’t going to do this,” Hockett says, “I thought, ‘Well, let’s try it some other way.'”

In July, the City of Richmond sent letters to 32 banks and mortgage holders offering to buy 624 underwater mortgages.  None of the offers were accepted.  So, the city is moving forward with a new plan to buy the homes at a discount price with the help of MRP.  The city hopes to avoid using eminent domain, although legal experts believe the scenario would hold up if pushed to the Supreme Court. According to Mother Jones,

After Richmond seizes the loans, new lenders arranged by MRP would step in and essentially refinance them. The borrowers would stay in their homes, and the new loans would reflect the current value of the properties. In this scenario, a family in Richmond that bought a $300,000 house that’s now worth $200,000 would see its monthly payments decrease by $300 to $800.

While the vote by the Richmond City Council has not yet changed anything for the city, it has provided momentum for other cities who were considering the MRP plan but were unwilling to go up against big banks.  

On Tuesday, Vallejo’s City Council voted 6-1 to create an ad hoc committee to study the issue.
“Clearly we’ve got a similar situation here to Richmond, with foreclosures still depressing property values,” said Vallejo City Manager Dan Keen. He said Vallejo is “in wait-and-see mode, depending on the outcome of the litigation initiated against Richmond.”

In San Francisco, Supervisor David Campos wants to study ways to address foreclosures, including eminent domain. “My resolution doesn’t say let’s do this (exert eminent domain), it simply says let’s study that possibility and different options,” Campos said.

El Monte Mayor Andre Quintero said in an interview that its council voted last year to enter into an advisory agreement with Mortgage Resolution Partners. However, El Monte is still analyzing the concept.
“The fact that Richmond took this step … hopefully will encourage our city and other cities to consider joining the JPA so we can look at this as a larger body.”


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