The city of Richmond and a shadowy group of hedge fund investors have told you that seizing mortgage loans through eminent domain (paying less than market value) and rewriting them to current value will suddenly, and without consequence, create instant equity for homeowners. It would be wise to be skeptical.
Richmond officials have agreed to participate in an untested and legally dubious plan, ostensibly to help homeowners.
It's a plan that has been rejected by cities across the country, and by Republicans and Democrats alike. Additionally, Fannie Mae and Freddie Mac (which provide the backstop for roughly 90 percent of mortgage loans in the nation), have made it clear they oppose the plan and will vigorously fight it if necessary.
Fundamentally, the program seeks to solve a problem that is solving itself. One of the main premises of the program is that home values are depressed, and the only way to "fix" the problem is to wave the magic wand of eminent domain.
On the contrary, the housing market is recovering in a big way. In June, median home prices in Contra Costa County posted a 31.5 percent year-over-year gain, and Richmond home values have increased 22.7 percent in the last year, giving homeowners in the city an average of more than $37,000 in value.
However you slice the numbers, hundreds and thousands of homeowners are no longer "under water" and will continue to gain equity as the market recovers.
As a resident and small-business man in the area for many years (my father arrived in Richmond in 1946, and worked in the Richmond Unified School District for nearly 40 years), I am deeply concerned about the long-term unintended consequences of the city's eminent domain program.
The lifeblood of any healthy housing market is access to affordable credit for borrowers. If we lose the backstop that the federal government provides through Fannie Mae and Freddie Mac, there will be a severe reduction in the ability of well-qualified borrowers to get a mortgage.
No lender in his right mind would offer a loan if he knew the city would likely seize it if the value of the home dropped below the loan amount. And if they did extend credit, that risk would be felt in much higher costs, essentially killing our local housing market.
Whether or not their individual mortgage ends up a part of the program, homeowners in Richmond would likely see their home value decline as the supply of mortgage credit dries up around them.
With fewer and fewer homes on the market (and fewer borrowers able to qualify), neighborhoods and families begin to lose wealth.
The harm caused by the program won't be limited to Richmond's housing market, however. Proponents of the program have argued that the loans will be seized from "big bank" or "Wall Street investors," but the truth is that more than one-third of the roughly $1.3 trillion in the securities targeted by the program are held by pension plans, annuities, mutual funds and more.
That includes the pensions of local police officers, firefighters, teachers, and others who are more "main street" than Wall Street. It is unconscionable that we would put their well-earned retirements at risk in a for-profit scheme designed to enrich a few at the expense of many.
Bottom line: We simply cannot afford to be the guinea pigs for an untested and constitutionally dubious plan that will end up hurting current and future homeowners. I urge Mayor Gayle McLaughlin and city leaders to reconsider before it is too late.
Chris George is the president of CMG Financial, one of the largest East Bay mortgage bankers.