Like many cities in the United States, Richmond, California suffered greatly from the recent mortgage crisis. The foreclosure crisis hit Richmond hard in 2009, when more than 2,000 homes in Richmond went into foreclosure. This figure is especially shocking given that there were 18,659 owner-occupied housing units in the city at that time. In 2012, the city saw an additional 914 foreclosures and a foreclosure rate of thirty out of 1,000 homes (well above the national average of thirteen of every 1,000 homes). Today, it is reported that nearly forty-six percent of homes in Richmond are “underwater,” meaning that what is owed on the mortgage is more than the current value of the property. Seeking to put an end to the foreclosures, the City of Richmond announced a plan on July 30, 2013 to use the power of eminent domain to buy underwater mortgages from lenders5 The city plans to buy the mortgages for eighty percent of a home’s current value, a price they believe is high enough to amount to the just compensation that is required by the Fifth Amendment’s protection against the taking of private property. Richmond would then convert the acquired mortgages into FHA loans with smaller principals that correspond with the current value of the home. FHA loans are insured against default by the Federal Housing Authority (a section of the United States Department of Housing Development) and are issued by private, FHA-approved lenders. On August 7, 2013, several banks representing the bond investors that owned these underwater mortgages filed suit against the city, challenging the plan’s constitutionality. Given the current state of eminent domain law, which allows for eminent domain to be exercised for the public purpose of economic development, some argue that Richmond’s plan passes constitutional scrutiny. However, this use pushes the boundaries of legitimate exercise of eminent domain, even under the majority opinion in Kelo v. City of New London, Conn, which confirmed that economic development is proper grounds for states to exercise eminent domain.
Eminent Domain for the Seizure of Underwater Mortgages,
U. Mich. J. L. Reform Caveat
Available at: http://repository.law.umich.edu/mjlr_caveat/vol47/iss1/3
This Comment was originally cited as Volume 3 of the University of Michigan Journal of Law Reform Online. Volumes 1, 2, and 3 of MJLR Online have been renumbered 45, 46, and 47 respectively. These updated Volume numbers correspond to their companion print Volumes. Additionally, the University of Michigan Journal of Law Reform Online was renamed Caveat in 2015.