The City of Richmond, CA, has taken a fateful step towards invoking eminent domain to help home owners who owe more on their houses than they are worth – in some cases several times more. The city has sent letters to lenders, asking them to sell the loans on these homes at “fair value” in order to help these families stay in their homes; otherwise the City of Richmond plans to invoke eminent domain to condemn the loans.
While all of this sounds well-intended, even generous, the reality is that a number of Wall Street hedge funds and Democratic political supporters are planning to once again punish private investors in the name of helping unfortunate consumers. Many of the homes in Richmond are underwater, in some cases with mortgage debt several times the current value of the home. But while the misery of the residents of Richmond is very real, the avaricious agenda of the powerful Democratic interests behind the plan once again illustrate how liberals use the power of government to engage in acts of theft.
Mortgage Resolution Partners (MRP) is advising the City of Richmond. The firm’s chairman, Steven Gluckstern, is a major supporter of President Obama and other Democratic elected officials who stand to profit from the eminent domain movement. Liberal luminaries such as Willie Brown, Rep. Nancy Pelosi (D-CA), and George Soros are backing the effort, which promises to return more than 20% returns to MRP. The only catch is that these profits are coming at the expense of private investors in mortgage securities, who face the prospect of theft at the hands of the City of Richmond and other communities that have not benefited from the modest recovery in housing prices.
“The city is offering to buy the loans at what it considers the fair market value,” reports The New York Times:
In a hypothetical example, a home mortgaged for $400,000 is now worth $200,000. The city plans to buy the loan for $160,000, or about 80 percent of the value of the home, a discount that factors in the risk of default. Then, the city would write down the debt to $190,000 and allow the homeowner to refinance at the new amount, probably through a government program. The $30,000 difference goes to the city, the investors who put up the money to buy the loan, closing costs and M.R.P. The homeowner would go from owing twice what the home is worth to having $10,000 in equity.
The problems with the MRP plan are several. First and foremost, MRP is using the power of eminent domain to effectively steal 20% of the current value of the house from the private investors who hold the mortgage. MRP is only attacking loans held by investors rather than loans owned by the largest banks because they know that the big banks will litigate them into annihilation. Keep in mind that investors in private mortgage securities have already been hurt by the big banks and acts of liberal generosity like the foreclosure settlement with the various state AGs. This latest effort merely adds insult to injury.
The swarm of liberal activists, financial firms, and lawyers looking to profit via the eminent domain issue is staggering. Former California state treasurer Phil Angelides, who in 2009 was tapped by then-House Majority Leader Rep. Nancy Pelosi (D-CA) to lead a federal investigation into the causes of the financial crisis, served as executive chairman at MRP until earlier this year, the Free Beacon reports. Angelides stepped down from his position in January after Reuters reported on his role and revealed a letter he sent to prospective investors, in which Angelides detailed the MRP strategy to use “legal and political leverage” to acquire underwater mortgages and resell them at a profit of up to 20 percent. Angelides referred to the firm’s political connections as its “secret formula” in the letter.
There may be a silver lining in this mess for those Americans who still believe in property rights and the rule of law. The efforts by the City of Richmond and the Democrat activists who support it may provide the US Supreme Court with an opportunity to roll-back the use of eminent domain. In the 2005 case Kelo v. City of New London, the Supreme Court allowed the use of eminent domain to transfer land from one private owner to another private owner to further economic development. In a 5-4 decision, the Court held that the general benefits a community enjoyed from economic growth qualified private redevelopment plans as a permissible “public use” under the Takings Clause of the Fifth Amendment.
The Richmond case may provide a vehicle to roll back the Kelo decision and place limits on the use of eminent domain by liberal activists, in this case to steal property from private investors in mortgage backed securities. Arguing for the minority in the decision, Justice Antonin Scalia suggested that a ruling in favor of the city would destroy “the distinction between private use and public use,” asserting that a private use which provided merely incidental benefits to the state was “not enough to justify use of the condemnation power.”
Let’s hope that the action by the City of Richmond offers an opportunity for conservatives to slam the door on the use of eminent domain to loot the property of private investors.