Richmond, Calif., made headlines this year when city officials began considering a plan to use eminent domain to take over underwater mortgages. The proposal would force banks to sell the mortgages at a loss, though at current market values. Then a firm hired by Richmond would fund and finance new mortgages at reduced rates for the current homeowners.
"It's designed to prevent foreclosures, keep people in their homes, stabilize our neighborhoods and give our local economy a chance to recover," said Mayor Gayle McLaughlin.
So far, however, such novel use of eminent domain in this city east of San Francisco has remained little more than a threat, and rather than helping the housing market, it may be causing further damage.
"Several transactions have collapsed," said veteran real estate agent Jeffrey Wright, an outspoken critic of the plan. He said lenders are wary of making loans in a city where eminent domain could be used to break a contract.
The Federal Housing Administration could prevent Freddie Mac and Fannie Mae from lending where such a plan is approved. At the same time, Wright claimed he knows of at least one seller who has pulled out of a short sale, hoping he can keep his home if the eminent domain plan goes through.
"There's a very high likelihood that this person could lose their property, when they could have sold it on a short sale," said Wright, "because they're waiting on a program that's not up and running, and may never be up and running."