Richmond to seize hundreds of mortgage loans from banks to revive its communities
From the Chevron refinery explosion to deepening pain of the housing crisis, the city of Richmond has endured a lot.
Walk through Richmond's Iron Triangle neighborhood and the signs of economic turmoil are everywhere. Homes there have been foreclosed or abandoned for years. Some windows are boarded up, others shattered. In lieu of decorations, signs bearing "DO NOT ENTER" warnings are posted on every other door. Bedding peeks out from beneath one of the abandoned homes.
Despite the neighborhood's struggle, life goes on.
Families still live here. Just around the corner from the worst of the crumbling houses children ran after an ice cream truck, whose music could be heard blocks away. The ice cream man, Ank Talwar, said that the crumbling neighborhood had seen progress.
"It's better than before," he told the Guardian. Speaking through a metal barricade in his window, he said five years ago the neighborhood was nearly uninhabitable due to crime.
It's that tenuous progress that Richmond Mayor Gayle McLaughlin points to when justifying Richmond's controversial plan to use eminent domain to seize over 600 underwater mortgages, which would allow families to make payments to the city instead of the banks.
The most important aspect of this plan, she says, is that those families get to stay in their homes.
When Richmond's plan to use eminent domain to seize mortgages was first unveiled, it triggered a national debate . It's a legal tactic typically used by governments to seize land needed for public use — parks, freeways, or other major infrastructure projects.
The seizure plan's opponents say that this is a twisted use of eminent domain and a government overreach  meant to siphon money rather than benefit the public good. But however one views the city's solution, nobody can argue that the underwater mortgages haven't caused trouble for Richmond.
In a legal declaration, City Manager William Lindsay detailed the lingering pain in the wake of the housing crisis.
"According to the city's research, Richmond has one of the worst situations in the country, with approximately 51 percent of homeowners underwater on mortgage debt," he wrote. In the past three years, Richmond has been slammed by more than 2,000 foreclosures.
Like a spreading infection, the disease of debt doesn't just affect homeowners.
There are hundreds of vacant homes in Richmond, Lindsay wrote, attracting rats, criminals, and dumping from neighbors. One of the abandoned properties the Guardian visited had a sea of garbage that filled the entire yard: mattresses, broken televisions, baby seats, and other abandoned items.
Property values took a hit too, which Lindsay wrote had a "catastrophic impact" on Richmond's tax base, declining from $48 million in 2007 to $41 million in 2012, a more than 14 percent decrease. Lowered tax revenue forced Richmond to cut its city staff by about 200 workers.
Families were losing their homes, neighbors were living in wrecked neighborhoods, and the city hemorrhaged money. To put it bluntly, Richmond was desperate.
That's where Mortgage Resolution Partners  came in.
MRP is the brainchild of John Vlahoplus and Robert Hockett , two Rhodes Scholars who sought a way to rescue the economy from a growing problem: Busted mortgages were reducing the nation's spending. More than 11 million homes are underwater throughout the United States, according to data from mortgage metric site CoreLogic.
That these mortgage loan investments were locked up in cities and held by big banks that Washington had recently bailed out made national action on the problem less likely, which led Vlahoplus to a novel solution.
"I thought, how would you fix this? Buy them," he said. "How would you buy them? Eminent domain. Find someone with the incentive to do the economically rational thing, and that's what it was." This way, no national rescue would be needed and the solutions would come from the cities themselves.
The mechanics of the plan are anything but simple. Richmond offers anywhere from $180 to $150,000 to buy a bank loan that's worth about $300,000 (but sometimes more). The homes themselves are usually worth $200,000 or so, hence the term "underwater," as the borrowers usually owe much more than the homes are worth.
Richmond then offers the homeowner a new loan with lower, livable monthly payments, and MRP makes $4,500 in the transaction.
The sticking point is when the banks refuse to sell the loan to Richmond. That's when the city invokes eminent domain , seizing the loan whether the banks want it to or not. Hence the controversy.
This move has already been challenged in court. Wells Fargo, on behalf of investors like Fannie Mae and Freddie Mac, filed a lawsuit in August to stop Richmond's plan.
The suit paints a picture of a false Robin Hood, arguing that the plan pulls money from the banks' and investors' pockets, and funnels it directly into Richmond's coffers. Wells Fargo alleges that McLaughlin's strategy is an "unconstitutional scheme," a "profit-driven strategy," and would cause "substantial economic harm in Richmond and beyond."
But at this point, it may be the only card Richmond has left in its hand. And the stakes, McLaughlin said, are high.
"We've seen the situation get worse and worse," she said. "Having boarded up homes is in itself a blight, and often things go along with that like crime. People utilize these homes for drug activity and such. It's a burden on the city, a burden on the community. People are dealing with the devastation of their neighborhoods going downhill."
Though all of Richmond is affected when homes lose their value, those hardest hit by the housing crisis are the borrowers themselves.
Juan Sandoval is 45 years old, a father and a husband. After entering the U.S. from Mexico when he was 18, he built a life here. His single story home in the Belling Woods neighborhood is modest but welcoming, adorned with photographs of his wife and children. There are hints of the family's Catholic faith — the Virgin Mary peers down from a shelf behind a VHS copy of Disney's Dumbo.
Sandoval bought the house for $290,000 on a non-fixed rate a few years before the housing crisis. His home was last valued at $185,000, and now he owes the banks more than $450,000 on the mortgage. Sandoval is a prime candidate for McLaughlin's planned eminent domain seizure — without it, he'll soon lose his home, he said.
Only now returning to work after recovering from a back injury in his construction job, he's slowly built up debt, and couldn't afford to fix his house's furnace. His guilt grew as his family shivered through the cold at night.
The debt started to give him nightmares.
"I would wake up at night and be 'no that's not happening,' but it was happening," he said.
Above is a 20 minute audio interview with Sandoval, which you can download or stream.
Things got better four years ago when his daughter, Celeste, was born.
"She came during a very bad time for us. I think she came for a reason, she held the family together," he said. "We were having so many problems."
He pays $1,500 a month toward his mortgage now, but that will soon balloon to $3,000.
After his work injuries as a subcontractor, "money was not coming in," he said. The cost of his surgeries made it hard to make his mortgage payments, and so he asked for help. "I requested help from my bank, Central Mortgage this year." But by a stroke of luck, "they lost the paperwork."
After months of haranguing, the bank offered him a short sale.
But this is a home he wanted to keep for his family to live in, he said. As he looked over at a small pile of his daughter's toys, a pink stuffed rabbit and a toy car, he contemplated his family's future.
"It was too late for me, when I found out and figured out I made a mistake. The mistake I made was to trust the realtor with my family," he said. But now, he thinks his family may have a chance to stay. "If they do that program I will keep my house, my payment will be less, I will have the money to do all the repairs I need."
It's not just about helping out the 624 homeowners Richmond seeks to assist with their underwater mortgages, Vlahoplus said.
"The critical thing is this is not just about the borrower," he explained. "Did someone do something morally correct and get (tricked) by some scummy mortgage broker? Or did someone sign something illegally? This is irrelevant."
Instead, it's really about the surrounding homes, the neighbors and the local economy, he said. And there is data to back this up.
A study by researchers from Princeton University and the University of Chicago's Booth School of Business, titled Household Balance Sheets, Consumption, and the Economic Slump , identified a direct tie between lower property values and shrinking credit rates. The study showed that those with lower property value spend less on automobiles, which economists recognize as a significant part of the nation's economic contraction.
Homeowners in cities with fewer than 15 percent of mortgages underwater cut back a bit, the study found, but in zip codes where more than 50 percent of homeowners were underwater, consumers cut back their spending by five times as much.
Meanwhile, Richmond is slowly becoming immersed in underwater mortgages and foreclosures . In Sandoval's neighborhood, seven other houses within view of his doorstep had been foreclosed in the past year alone.
One homeowner we spoke with, Morris LeGrand, 56, thinks it's unfair that his underwater mortgage is dragging down the values of his neighbor's homes, and that's why he supports the eminent domain plan.
"All along when you talk to everyone on the street, everyone is struggling. Who wouldn't want to see an improvement in their neighborhood?" he said.
And with modern mortgage structures, which have investors in small slices from all over the country, it can be complex to negotiate for the loans without the eminent domain puzzle piece. Many of the loans are part of private label securities, sold by bond trustees like Wells Fargo to private investors.
It's akin to a form of high stakes gambling, Vlahoplus said, and everyone wants a piece.
Wells Fargo's lawsuit shows more than 230 investors have claims to the homes Richmond intends to help. The list spans eight pages of the complaint, showing the far-reaching list of financial partners with skin in the game — assets they'll protect at any cost.
In addition to Wells Fargo filing suit against Richmond, a cluster of Wall Street lobbyists clad in gray suits, acting on behalf of the investors whom Wells Fargo represents, flew into the economically depressed city for a face-to-face with McLaughlin.
"We met with them here at City Hall," McLaughlin recounted. "They utilized their bullying tactics and put out threats to get us to back off. When we questioned them on an alternative solution to the problem (of foreclosures), they had none."
They threatened to redline the city, McLaughlin said, a practice that basically means no investments or loans would be made in the city of Richmond.
And now it seems they've followed through with their threat.
Last week Wall Street rebuffed the refinancing of Richmond's municipal bonds  despite their A- rating, an unusual move that led the city to pull the bonds from the market.
The bonds are used by cities to fund public works, and lack of bond financing could mean a tough road ahead on new schools and infrastructure projects.
Standard and Poor's released a report on eminent domain in Richmond from last week saying the tactic "may present inconsistencies in solving the root cause of the housing problem in the US, create unintended consequences for both borrowers and investors, and inadvertently limit mortgage lending activity."
McLaughlin said she would fight Wells Fargo and Wall Street tooth and nail.
Channeling her activist past, the Green Party mayor led a rally outside Wells Fargo's headquarters in downtown San Francisco on Aug. 15, flanked by 50 Richmond protesters bearing picket signs. After asking to speak with someone from Wells Fargo, she was met with locked doors and a runaround from a company representative.
— Mark Calvey (@SFBizMarkCalvey) August 15, 2013 
Vlahoplus said the lawsuits and threats were merely a signal that the bankers were scared, and in his estimation, what they fear is diffuse control — because it's difficult for national companies to combat policy changes at the local level.
"(Financial industries) can control things in the White House with contributions to the right committee chair," he said. If Washington or even state level government tried to swoop in and buy up mortgages, it'd be easier to stop. But if every local municipality suddenly had the power to do this, it would be tough to combat each one.
"It's like Whac-a-Mole," he said.
But Wall Street may soon have help. Richmond Councilmember Nathaniel Bates  said he will introduce a proposal to withdraw the offers on the underwater mortgages in a council meeting Sept. 10. When it was revealed that a small number of the mortgages to be seized were from million dollar homes, he called the effort an "embarrassment," and told the Guardian he could understand why investors would reject the city's bonds.
"I don't see this as redlining, (Richmond) is a risky investment when you have eminent domain hanging over people's heads," he said. "I tell you a lot of people are unhappy, and it's going to be a packed house at the council meeting on the tenth."
But despite the risks, other municipalities are already thinking of joining in. Wells Fargo's lawsuit names the California cities of El Monte, La Puente, San Joaquin and Orange Cove as well as Newark, Seattle, and North Las Vegas — because all are considering joining MRP and using eminent domain as a tool to aid homeowners.
Wells Fargo's lawsuit characterizes the plan as a "wealth transfer" that would "advance local concerns at the expense of an entire sector of interstate commerce that is critical to the health of the national economy."
But in the view of homeowners like Sandoval and progressive-minded mayors like McLaughlin, the national economy has already hit rock bottom, and blame is on the banks.
"They caused the problem. They've been bailed out and haven't been regulated, and haven't been forced to do the right thing by the people they've impacted," McLaughlin said. "I'm willing to go as high as the Supreme Court to settle this on behalf of our community."