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Forceful Mayor's Drastic Plan to Stop Foreclosures

courier-journal.com | September 30, 2013

By Martin E. Klimek

RICHMOND, Calif. - Gayle McLaughlin looks and sounds like the former school teacher and data entry worker she was - down to her sensible brown walking shoes.

What the 5-foot-4-inch mayor of this working-class San Francisco Bay Area city does not resemble is the ready-to-march, dogged corporate thorn she is.

Her latest opponent? Wall Street.

McLaughlin, a member of the leftist Green Party, is leading a novel effort by the city to buy 624 underwater mortgages in Richmond, pay the investor-owners some of what they're owed and set the homeowner up with a new mortgage closer to the home's current value.

If investors don't sell, the city says it may use its eminent domain powers to seize the mortgages at fair market value.

The idea is to prevent foreclosures, which cause blight, and help homeowners still stuck with mortgage loans far greater than their home's value, McLaughlin says.

"People were tricked. They were sold these bad loans. This is a question - for me - of a community being victimized," says McLaughlin, 61, a longtime renter who "owned a trailer once."

Richmond's threat to use its eminent-domain powers, which allow governments to take private property for public use, has unleashed a torrent of opposition.

Banks, government regulators, mortgage bankers, Realtors, investors and land title companies say the plan is unconstitutional, will shortchange investors who own the mortgages, including pension funds and threaten mortgage lending and property rights.

"If investors get ripped off today, why would they put capital to work tomorrow?" says Tom Deutsch, CEO of the American Securitization Forum, whose members include issuers and investors in mortgage-backed securities. If any city does it, "It'll set the precedent nationwide," he says.

Richmond, a city of 105,000 that is 70% minority, was hit hard in the housing bust.

Home values tanked 66% from their peak in 2006 to a median of $156,000 at the end of 2011, Zillow data show. That's led to thousands of foreclosures and millions of dollars in lost property tax revenue, McLaughlin says. Home prices have climbed back to a median of $218,000, but four of 10 mortgaged homes are still underwater.

Many of those are at risk of foreclosure, McLaughlin says. Last month, she marched with other protesters to Wells Fargo's headquarters in San Francisco in support of the plan.

"It is not an option to stand on the sidelines, waiting for the next wave of foreclosures," McLaughlin says. "We are going to stand up to Wall Street."


No Stranger to Political Fights

The second-term mayor, whose career in government started as a Richmond City Council member in 2004, is accustomed to tough fights.

Growing up in Chicago, she was the third of five daughters born to a union-carpenter father and a factory-worker mother. She's spent decades on the other side of the powers that be - opposing the Vietnam War, supporting the Central American solidarity movement and numerous environmental causes.

In her 2010 mayoral race, she survived an attack by the city's police and fire unions that exposed an earlier, unsuccessful attempt to shed personal debts by filing for bankruptcy. McLaughlin says the "smear" campaign backfired, and voters identified with her ability to overcome financial challenges.

McLaughlin has also repeatedly clashed with Chevron, the city's biggest employer. Last month, the city sued Chevron, alleging that a 2012 fire at the local refinery reflected "years of neglect." The suit asks for financial compensation for economic damages and punitive ones to deter similar future conduct.

Chevron, which agreed to pay the county $2 million stemming from the fire, says the lawsuit is a "wrongheaded attempt" to take advantage of the refinery fire.

McLaughlin expects it to force Chevron to "change its corporate culture so our community can be safe."


A Message from Wall Street?

Not everybody applauds McLaughlin's tactics.

"You don't bite the hand that feeds you. â?¦ You sit down with them," says Richmond City Councilman Nathaniel Bates, a frequent McLaughlin opponent. He says Chevron is working hard to modernize a 111-year-old plant that predates the city.

The use of eminent domain won't hurt Wall Street as much as it'll hurt Richmond, Bates says.

He fears that investors won't buy Richmond's bonds if the city proceeds. Richmond may have gotten such a warning shot last month when it failed to find takers for a $34 million bond offering.

The city also isn't offering enough for the mortgages, Deutsch says.

For the 624 home loans, Richmond offered a "fair market value" that averages 52% of what's owed, shows an analysis by independent consulting firm PF2 Securities Evaluations. Of the loans, 444 of them are current. The median balance owed is about $380,000.

The city may take control of the mortgages by eminent domain if investors don't agree to sell, though it would still have to compensate them.

"It's kind of like an offer you can't refuse â?¦ a Godfather-like thing," says Richmond Realtor Jeffrey Wright, who also opposes the plan.

He says the issue is less about preventing blight - especially since some of the homes would quickly re-sell if foreclosed on - and more about the mayor's politics.

"It's a social justice crusade," Wright says. "From the mayor's perspective, the banks have done the people wrong."

Here's how the plan would work. Assume a house has a $300,000 mortgage. The city might argue its current value is only $160,000. If a judge agreed, the city would use funds from investment firm Mortgage Resolution Partners to buy the loan. The homeowner would refinance into a new loan, perhaps for $190,000. Those funds would pay off the city. The $30,000 difference between what the city paid, and what it got, would be split among MRP, its investors and the city.

The plan's implementation is far from certain.

After an eight-hour city council meeting earlier this month, the council narrowly approved McLaughlin's proposal to take the next step with the plan and try draw in more cities. The council will have to vote again to actually seize loans and get a "yes" vote from one of the members who voted "no" at the last meeting.

If the city seizes a loan, "There would be an immediate court challenge," Deutsch says. What's more, if sellers aren't willing to sell, the courts would have to determine fair pricing for the mortgages.

Investors already filed suit against the plan once. A federal judge said the claims were not yet "ripe" because Richmond hadn't actually done anything yet.

A handful of other cities are considering the same strategy as Richmond's, but it's taken the idea the furthest, says Cornell University law professor Robert Hockett, a chief proponent.

Others have backed off. Those include North Las Vegas, Chicago and San Bernardino County in California, where opposition was also strong.

Richmond has enlisted more grass-roots support than those other places, supporters say, including from the Alliance of Californians for Community Empowerment.

What else is different about Richmond?

"The mayor," Deutsch says.

Back to September 2013 Archive

CFLA was founded by the Nation's Leading Foreclosure Defense Attorneys back in 2007 to serve the Foreclosure Defense Industry and fight pervasive Bank Fraud. Since opening our virtual doors, CFLA has rapidly expanded to become the premier online legal destination for small businesses and consumers. But as the company continues to grow, we're careful to hold true to our original vision. For us, putting the law within reach of millions of people is more than just a novel idea—it's the founding principle, just ask Andrew P. Lehman, J.D.. With convenient locations in Houston and Los Angeles, you can contact Our National Account Specialist and General Manager / Member Damion W. Emholtz at 888-758-2352 for a free Mortgage Fraud Analysis or to obtain samples of work product, including cutting edge Bloomberg Securitization Audits, Litigation Support, Quiet Title Packages, and for more information about our Nationally Accredited and U.S. Department of Education Approved "Mortgage Securitization Analyst Training Certification" Classes (3 days) 24 hours for approved CLE & MCLE Credit (Now Available Online).

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