The Impact of Eminent Domain - August 23, 2013

Eminent domain is at best a dangerous tool levied by cities to seize private properties for public use as long as it provides a public good. The loosely defined “public good” opens up a host of issues when city governments begin to exploit the definition. As with most bad laws, the key characteristic is broad wording, which allows governments to bend it as they will and grab more power under its authority.
Richmond, CA is the latest city to take advantage of the poorly written eminent domain laws by expanding their definition of public good. The city is attempting to seize 624 homes with underwater mortgages to prevent these homes from facing foreclosure. The crux of their argument is that government action is needed to prevent these homes from being foreclosed on and creating blight, and driving down surrounding property values. The city has sent letters to various lenders “asking” to purchase homes at a significantly lower rate than owed, and reminded the lenders that if they chose not to sell the city would enact eminent domain and seize the properties. Lenders are then left with the option of taking a massive loss on each loan, or face losing everything on it if they do not accept the earlier terms. Beyond being unfair for lenders, it’s also potentially more damaging than the instability that could be caused by the homes foreclosing. The proposed action would drive up lending costs in the area and slow market growth significantly. Since housing has been a centerpiece of the economic recovery, hemming it in like this would prove to be damaging to the recovery at large.
Recent news has also shed more questionable circumstances in the plan. While the city claims that the at risk houses would create blight in the city should they be foreclosed on, over 50 of the mortgages are for houses in high end areas of Richmond. These much more expensive homes include two million dollar residences, and pull the average value of the loans being seized to $387,800. The average offer being made is $202,678. 52 cents on the dollar is a hard pill to swallow for banks, and with the only alternative being a complete loss of the asset, major banks choosing to pursue litigation against Richmond is only logical.
The high end houses would be much more likely candidates for moving off the market quickly should they be foreclosed on and would not create the blight Richmond city officials warn of. In comments to the San Francisco Chronicle, the city claims that these houses may not make the “final cut” but admitted to not doing their due diligence in regards to selecting the homes initially. If the city isn’t responsible enough to check these houses beforehand, what insurances are they giving in order to help these owners refinance at a rate beneficial to the owner? Or even that the owner would be allowed to maintain ownership once eminent domain is enacted? Once again, it comes down to poorly defined terms, and leads to a dangerous proposition for lenders and borrowers alike.
With the risk proposed by the city of Richmond, Sterling Pacific Financial currently not extending credit in instances where the collateral is located within Richmond. Doing so would open ourselves and our investors to risk of having property being used as collateral seized under eminent domain, and render us unable to retain even the principal amount. This is the sort of risk that greatly drives up the cost of lending in areas that enact eminent domain, making it more difficult for those willing and able to repay to secure loans.

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