Can Eminent Domain Be Used to Avert a Foreclosure Mess? This California City Thinks So
Richmond, Calif., demonstrators in front of a local Wells Fargo Branch.
Photo Credit: Mark Andrew Boyer
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Morris LeGrande believes that, sooner or later, the bank's going to come for his house. The 57-year-old jazz musician lives in the largely African-American Park Plaza neighborhood of Richmond, Calif., and owes more than $400,000 on his mortgage. According to a recent assessment, his house is only worth about $130,000. LeGrande is current on his payments, but in 22 years he will have to make a single lump-sum payment of $194,000.
"At the end of the day, we will lose this home," LeGrande says. "There's no doubt about it."
LeGrande has become a de facto spokesman for underwater homeowners in a city where more than 40 percent of all mortgages are underwater, according to Zillow.
Richmond, a city of about 100,000 people (where the largest employer is a local Chevron refinery that made national headlines last year for a massive fire leading thousands of residents to sue for damages) is contemplating using an unlikely tool to rescue homeowners and help keep them in their homes: the power of eminent domain.
The city has become ground zero in a standoff between housing advocates and big banks, which argue that the unprecedented scheme could unsettle the market for complex mortgage-backed securities.
If the plan succeeds, it could set off a chain reaction among cities big and small. And it could transform eminent domain—a power that has long been used to displace residents, often in communities of color—into a tool to help stabilize neighborhoods.
Here's what has happened so far: In July, city officials sent letters to 32 mortgage companies offering to purchase more than 600 underwater mortgages for about 80 percent of their market value. (80 percent, the plan's proponents say, because some loans are at risk of default, though banks have countered that the markdown is merely a moneymaking scheme since the principal amounts will be adjusted to their full market value). Once the city obtains the loans, it will help homeowners refinance at more affordable rates. If the banks refuse to sell, Richmond is threatening to use eminent domain to seize the mortgages.
The contagion of foreclosure
The idea of using eminent domain to this end is widely attributed to Cornell University law professor Robert Hockett. Under the plan, Richmond would use its power to seize the mortgages, write down the principal to its fair market value, and refinance them at more affordable rates through government programs.
Eminent domain is a power that cities have traditionally used to force people from their homes to make way for large public works, like highways and stadiums.
“[It] has become what the founding fathers sought to prevent: a tool that takes from the poor and the politically weak to give to the rich and politically powerful,” writes Dr. Mindy Fullilove, a professor of clinical psychiatry at Columbia University, in the conclusion to her 2007 Institute for Justice report, "Eminent Domain and African Americans."
Drawing on a decades-long history of seizure, Fullilove notes that from 1949-1973, more than 2,500 projects in 992 cities were carried out through eminent domain—displacing a million people. Two-thirds of them were African-American.
“What the government takes from people is not a home, with a small ‘h’, but Home in the largest sense of the word: a place in the world, a community, neighbors and services, a social and cultural milieu, an economic anchor that provides security during the ups and downs of life, a commons that sustains the group by offering shared goods and services,” Fullilove writes.
Remarkably, Richmond is looking to become the first city to use eminent domain to keep people in their homes—and in their "Home," economically anchored.