A California city's controversial plan to use eminent domain to help its residents burdened with mortgages worth more than their homes has caught the eye of some Baltimore leaders, who say the city might benefit from the program.
There are thousands of such underwater mortgages in Baltimore, so 4th District Councilman Bill Henry has asked the City Council to explore the possibility of using the city's power to take mortgages from banks and then work with a private firm to refinance the loans based on current property value.
The city of Richmond, Calif., pioneered the idea by establishing an authority to offer to buy underwater loans from lenders and, if refused, seize them by eminent domain for refinancing using the home's current value. New, private investors would fund the program, which targets loans that are difficult to refinance because they are locked up in private-label securitizations, packages of mortgages sold by investment banks.
Under eminent domain, property must be acquired for "fair market value," which means the city could force the owner to take a loss on the face value of the loan.
Divisions of Wells Fargo & Co. and Deutsche Bank AG promptly sued Richmond over the program, saying it is driven by profit, not public good. Mortgage investors, the banks argued, would be hit with "irreparable economic harm" if the program moves forward. A federal judge dismissed the case, and a similar one filed by Bank of New York Mellon and others, saying the program has yet to go into effect. The banks appealed.
The Federal Housing Finance Administration also criticized the program, saying it would instruct Fannie Mae and Freddie Mac to stop working in municipalities that adopt such a program. Since Fannie and Freddie buy, repackage and sell most of the nation's mortgages, that would severely crimp the availability of mortgage lending in those communities.
Underwater mortgages remain a problem around the country as the residential real estate market slowly rebounds from its collapse.
In the Baltimore-Towson area, about 13 percent of mortgages are underwater, meaning the mortgage debt is greater than the current value of the property, according to a CoreLogic analysis based on June data. In Maryland as a whole, about 17 percent of mortgages are underwater, which is considered a predictor of future default.
Some areas have much higher rates. In Baltimore's Carrollton Ridge, for example, 41 percent of homes are underwater, with 19 percent delinquent, according to ZIP code analysis by Zillow.
"People whom I respect in the housing field believe this is an appropriate way to proceed to address that problem, and therefore I'm hopeful that the city will seek to use its eminent domain authority for this purpose," said state Del. Samuel Rosenberg, a Baltimore Democrat who grew interested in the program last year after reading about it.
Henry asked the council Nov. 18 to look at the way Richmond is using eminent domain and issue a resolution in support of that city's efforts. The resolution was sent to committee.
"It would be one thing if we could rely on all banks to be completely responsible property owners and maintain those properties in the same condition that an owner-occupier would, but the truth of the matter is that we can't and a lot of times what that ends up meaning is vacant, blighted houses," Henry said.
Richmond is working with Mortgage Resolution Partners, a San Francisco-based firm, that would arrange the refinancings under the program. The company proposed the idea in Richmond and would collect $4,500 for each mortgage refinanced there.
The firm's staff has spoken "informally" to people in Baltimore about the Richmond program, said Steven Gluckstern, executive chairman of Mortgage Resolution Partners. He estimated that "many thousands" of people in Maryland, especially in Baltimore City and Prince George's County, could be eligible for such a program.
"I am very confident that the legal arguments are all on the side of the cities and municipalities," Gluckstern said. "The opposition will make it sound like, 'Oh, they're being ripped off. … [But] these loans trade every day."
The city has tried to improve the housing market with broader intiatives that incentivize homeownership, but it has not focused on underwater mortgages, said Ken Strong, a deputy commissioner for Baltimore Housing. The city is "open" to those ideas, he said.
"We're continuing to try to innovate and think of new ways to address those problems, so sure, we'd be happy to study it," he said.
District 5 Councilwoman Rochelle "Rikki" Spector, who opposed immediate adoption of the resolution last week, said she did not know enough about the program to be willing to send a signal of support.
She said she is concerned that the city would assume the risk of the loans and that refinancing mortgages would lead to lower property values, hurting the city's tax base.
"I don't know anything about the program, but it seemed like nobody else did either," she said. "It's way beyond anything that made any sense."