Richmond, California has become the first city to implement a program to use eminent domain to seize underwater mortgages in order to stave off foreclosure for its residents. 

Under the program, the city will first offer to pay the holders 80% of the fair market value of the homes securing the mortgages.  The city will then assist the borrower in restructuring or refinancing that reduced amount.  Mortgage Resolution Partners, an investment firm that is advising Richmond with regard to the eminent domain program and is assisting the city in obtaining financing for the program, will receive $4,500 for each mortgage acquired by the city or restructured or refinanced by the city. 

If lenders do not voluntarily sell the mortgage under these terms, the city has said that it will use eminent domain to seize the mortgages.  The city has sent notices to the holders of more than 620 mortgages, according to local reports, and plans to expand the program in the future, according to local officials.

The program is very unpopular with banking and industry groups, who believe that the program will have undesirable side effects. 

“The program is a short-term solution for a few underwater borrowers that will have severe negative long-term costs for every homeowner in the city," said Mortgage Bankers Association President and CEO David H. Stevens.  "Mortgages in Richmond will become more expensive, making neighboring cities more desirable for prospective home buyers, which will hold down home values for everyone in Richmond."

Many industry groups, including the MBA, also believe that the program is unconstitutional.  The MBA believes that the extent of involvement of the private entity in the refinance process will amount to a violation of the requirement that eminent domain seizures be for a public use.  Additionally, the MBA believe that the program would impair existing contracts, violating the Contracts Clause of the constitution.  Finally, the MBA believes that the amount being offered to mortgage holders does not justly compensate them.

Legislation was introduced in Congress last week to prevent programs such as Richmond's from getting off the ground.  The legislation, entitled the Defending American Taxpayers from Abusive Government Takings Act, would prevent Fannie Mae and Freddie Mac from purchasing any seized mortgages.