RICHMOND -- Millions of Americans have lost their homes, and millions more could meet the same fate in a foreclosure crisis that continues to hammer communities across the country. Now, a San Francisco investment firm thinks it has found a remedy to the epidemic that has for years vexed national and local leaders -- and a willing partner in a Bay Area city that is no stranger to pursuing radical ideas.
The idea is to use the tool of eminent domain, which usually is associated with government taking private property from people, to keep families in their homes. Under a plan now taking shape, Richmond would seize underwater mortgages and work to refinance them under terms the homeowners could afford.
Mortgage Resolution Partners (MRP), the investment firm pitching the untested idea, already struck out in San Bernardino County and Salinas, where local leaders, after initially embracing the idea, got cold feet in the face of threatened lawsuits and fears that the home loan market would dry up.
But Richmond, which last year tried to become the nation's first city to tax sugar-sweetened beverages to fight obesity, appears to have no such reservations. City and Mortgage Resolution Partners officials are working on the details of a plan that could make Richmond the national testing ground for the use of eminent domain to stabilize foreclosure-ravaged communities.
But like the so-called "soda tax" that was overwhelmingly rejected by Richmond voters in November, this proposal faces fierce resistance from a deep-pocketed industry that sees plenty to lose if the strategy takes hold. Many legal challenges await the city that tries to knock down the first domino, including arguments that the plan tramples on basic property rights.
"Just like the soda tax, you have an industry that fiercely defends their status quo and won't tolerate one broken window in the whole institutional facade," Richmond Councilman Tom Butt said. "Richmond is the window breaker that must be stopped."
City Manager Bill Lindsay grew intrigued with the idea after hearing Mortgage Resolution Partners' pitch at a meeting of top public administration officials from throughout Contra Costa County. He invited firm chairman Steven Gluckstern, who has pushed the idea up and down the state, to take a shot with Richmond.
Gluckstern is no Robin Hood for Richmond's struggling homeowners. He says his goal is to make money, but to do so in a way that saves struggling homeowners and improves the local economy.
"We started with our hearts but recognized there was an opportunity to earn returns for solving the problem," he said. "It turns out that if you solve problems, you can get paid for that. That's the beauty of America."
The plan, according to MRP and Richmond officials, goes something like this: After a government agency seizes the underwater mortgage, investors brought together by MRP pay off bond holders at close to the current appraised value, then line up a new mortgage for the homeowner at far less than the previous amount. MRP takes a $4,500 cut from the new lenders.
The idea's appeal, in part, lies in the frustration with private-label securities, or bundled-up loans owned by investors all over the world.
"These mortgages are managed by a mortgage servicer that has no power to change the terms," Lindsay said. "So you're stuck because you can't negotiate with 300 people in 300 places. It's a classic market failure that prevents reasonable solutions from being reached."
Not everyone is so sanguine. Christopher Thornberg, founding partner of Beacon Economics and a leading California economist, said MRP's plan has been rebuffed elsewhere for good reason.
"This is a fundamental violation of property rights and the rule of law," he said. "It's similar to nationalization plays by other countries, except that in this plan the government transfers ownership (of the loan) to another party. Lenders won't want to loan in that kind of environment ... credit will freeze."
The City Council voted 6-1 in March to work with MRP on devising a broad plan to rescue mortgages using eminent domain and other tools. Gluckstern expects to return to the council with particulars in the next month or so.
No concerted effort to stymie the plan has emerged in Richmond to rival what happened in San Bernardino, where private jets dropped Wall Street elites into the desert communities to mobilize opposition.
But that could come, as it did when the beverage industry unleashed an avalanche of spending to doom the soda tax measure. A similar tax measure was defeated in El Monte, one of the handful of California cities that also has reached preliminary agreements with MRP.
The Securities Industry and Financial Markets Association has sent Richmond a stern letter, and members of the local Chamber of Commerce and banking industry have grumbled disapproval.
A coalition of 22 organizations, including the California Association of Realtors and the American Bankers Association, sent the city a letter last month warning against the plan.
"Concern over this proposal is very high within the industry," said Marcus Harper, chairman of the local government relations committee for the West Contra Costa County Association of Realtors. "The term 'eminent domain,' the taking of property, threatens to chill the local housing market."
However, some observers say Richmond's political leaders and grass-roots organizations make this an ideal place to try the idea.
"We're tired of waiting on the federal government to act, so we are pushing to implement a local solution to help thousands of homeowners get into more affordable mortgages and avoid foreclosure," said Amy Schur, campaign director for the Alliance of Californians for Community Empowerment.
A report released last month by the alliance revealed that 900 Richmond families lost their homes last year and that 4,600 local homeowners were underwater on their mortgages by about $700 million.
Robert and Patricia Castillo bought their three-bedroom home in the North and East neighborhood in 2005 for $420,000. Today, its value recently climbed back over $200,000, but the Castillos still struggle with an $1,800-per-month mortgage payment, which is set to increase to $2,500 in 2015. Their mortgage has been passed between several servicers and lenders, and they hope they would quality for MRP's plan.
"It's a struggle daily," said Robert Castillo, a diesel mechanic for the Berkeley school district. "Many of our neighbors have lost their homes."
Not everyone in Richmond is on board, however. Councilman Corky Boozé is "sure that banks and other lenders are going to run from Richmond if suddenly the City Council starts taking their money."
About 1,000 private-label securities mortgages may be targeted in the city for potential takeover, Gluckstern said.
"It takes courage to be first at anything, especially when you're going up against a powerful financial community making threats, saying the sky will fall," he said. "We think the courage is in Richmond, (and) demonstrating that this works is of enormous consequence throughout California and the country."
Much has been made about the housing market implosion and foreclosure crisis, the worst correction in the housing market in generations.
Recent studies have sought to highlight how this national scourge has played out on a local level. While it should be noted that some -- especially major mortgage-lending banks -- dispute the methodology used in the reports, the wealth destruction wrought on Richmond by home value losses and adjustable rate mortgages is staggering.
Today, half of all homeowners in the city are paying off loans that are worth more than their house and equity.
Highlights from recent reports:
Richmond in 2012
$1.4 million: Decline in property tax revenues to the city, including $7.9 million cost to local government from 2012 foreclosures
4,649: Underwater homeowners, or 49 percent of all mortgages in the city
230: Homes in the foreclosure pipeline
$712 million: Negative equity in underwater homes
Foreclosure rate: 30 per 1,000 homes (U.S. average: 13 per 1,000)
Sources: Alliance for a Just Society report, May 2013; Alliance of Californians for Community Empowerment Housing report, 2013