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Wednesday, September 28, 2016

Aug. 2 (Bloomberg) — Richmond, California, sent the securities and real estate industries into a tizzy this week. The city said it is moving ahead with plans to use its power of eminent domain to seize home mortgages and restructure them for residents who owe more money than their homes are worth.

This would be a first in the U.S. Normally when governments do things that upset Wall Street millionaires it’s a sign they’re going down the right path. There are exceptions, of course.

Here is another story about Richmond, a city of about 106,500 on the east side of San Francisco Bay. In May, its No. 2 administrator, Leslie Knight, stepped down. A corruption investigation, which started with a whistleblower complaint, found she had been using municipal offices and employees to run a personal gift-basket and party-favor business. She was also collecting a car allowance and using a city car at the same time. She later paid back $10,000 to the city, according to local news reports.

Knight wasn’t fired. The city manager gave her a warning and let her resign as assistant city manager and head of human resources, which meant she got to keep her pension. Protesters have picketed the district attorney’s office demanding that he prosecute her. (He declined.) The Contra Costa Times in June wrote that Richmond’s city attorney “stonewalled, trying to block public access to documents about the case” — which were released only after the newspaper brought in its own lawyer. The same city officials would oversee the new eminent-domain program in one fashion or another.

This is the nature of local government in much of the U.S. It tends to be corrupt. Or at least it has been that way everywhere I have lived, from Colorado and New Jersey to Texas, Florida and Arkansas. It’s easy to see how a plan to grab loans from their out-of-town owners would inspire graft. Supposedly city governments would have to pay them fair compensation, but you can be assured most would offer less. The losers mainly would be bondholders that own mortgage-backed securities.

Richmond has 4,600 underwater mortgages. It sent purchase offers this week to the owners of several hundred. Just wait till some nosy gadfly or enterprising journalist figures out that some of those borrowers are friends, relatives or patrons of local politicians — or on the city’s payroll themselves. It’s bound to happen, if not in Richmond then in other municipalities that try to follow its example. Then picture the recriminations as folks figure out who scratched whose back in exchange for getting their principal balance reduced by tens or hundreds of thousands of dollars. This could be the biggest wealth creator to hit some small towns since the invention of roadside speed traps.

Imagine what would ensue if a program like this were tried in some ethically challenged city such as New Orleans or Miami. Or Hoboken, New Jersey, the town I call home, where two of the last four mayors have gone to prison for taking bribes. Where I live, it’s amazing what people have managed to accomplish with brown paper bags of cash and by knowing the right people.

Some residents who receive help could be hurt worse. Like game-show contestants who win a new car and suddenly find they owe the Internal Revenue Service more money than they have, the lucky borrowers might face big tax bills if their loan reductions wind up counting as income. I suppose the city can dream up something magical to make those debts vanish, too.

  • sigrid28

    This land grab makes me reach for the Tums. I had to take a couple more Tums when this occurred to me: Many (if not all) LOCAL banks in municipalities trying on this new style of “nepotism and cronyism run wild” are owned and operated by the same gang that runs the town (or city). I used to call the one I barely escaped from with the clothes on my back “unfixable town.” Sometimes, it feels as though we are living in “unfixable state” or “unfixable country.” More likely, however, is that “unfixable” is the ultimate misnomer. Everywhere you look nowadays, the fix is in.

  • m8lsem

    Seizing the ownership interest in a promissory note and the mortgage or deed of trust securing the same … in order to change the interest rate and then market the note and deed of trust/mortgage under the new terms to interested note purchasers. Hmmm.

    Our family recently got a new home loan at a reduced interest rate and used the loan proceeds through the loan closing to pay off the existing mortgage. We (the wife and I) succeeded in doing this on the private side as our loan to value ratio was decent.

    Meanwhile the City of Richmond is doing this on loans that are under water, or compelling the owner of the note to do so. Do this often enough and lenders will wake up and renegotiate the notes at market rates and possibly also reduce the principle to market. There’s a federal program that calls for this, but banks have been very lax about using it. If I were the bank I’d be negotiating to split the difference.

    The loans in question were created during the mortgage bubble, and invention of derivates and credit default swaps, imaginative schemes of the banks to make a lot of money and screw the consumers, so what if it triggers the Great Recession. Somewhere are the individuals who made (m/b)illions off of inventing these schemes, whose posteriors were rescued by the feds when it blew up in their faces. As society has no effective way to punish them, let’s hope that there in fact is a hereafter when they will pay in spades for doing this to the country.