First time homeowners Morris and Luajana LaGrande, of Richmond, California were excited when they purchased a home for $310,000 in 2004 — and when the opportunity to refinance at nearly half a million dollars arose, they took it, making some improvements to their home like so many people did across the United States. But then 2007 happened, and the couple watched the value of their home plummet. They were forced to scrimp, save and struggle to conserve every penny and send it to their lender, and they watched the same thing happen to many of their neighbors.
In Richmond, as in many locales, underwater mortgages are ubiquitous, but they’re especially bad here. It’s estimated that more than half of the homes in the city, which is set under the looming shadow (both metaphorical and physical) of a Chevron refinery, now have mortgages worth far more than their value. Such loans are prime risks for default, which is in turn a significant risk for urban blight in a city already struggling with poverty.
Residents of Richmond, which is primarily Black and Latino, experience a poverty rate twice that of their fellow Contra Costa County residents, with about one in five people in the city living in poverty.
Solving this problem has become a pressing issue for city officials, led by mayor Gayle McLaughlin, and she’s come up with an innovative approach, drawing upon lessons from other cities and economists. She suggests buying the mortgages out at fair market value and reassigning them, allowing homeowners to stay in their homes with more manageable monthly payments. This approach is designed to promote homeownership, reduce the risk of urban blight, fight poverty and stabilize the market.
Many banks, however, are opposed. They argue that fair market value as determined by the city might not necessarily be unbiased, and they don’t want to sell the mortgages at reduced prices. That’s why McLaughlin has suggested a second component of her plan. If banks don’t take the initial offer (so far the city has sent out more than 600 offers), the city will seize the properties from the banks, citing eminent domain, a historic precedent allowing governments to take properties for public use. But is this really fair use of eminent domain, an already controversial activity? Banks don’t think so, and they’re willing to take that bet to court if they have to.
They’ve threatened to reconsider doing business in cities that put such plans in place, and a warning shot has already been fired across the bow in Richmond, where a recent bond offering elapsed without any takers. The city could end up caught in a game of chicken with financial institutions as it pushes the foreclosure plans through and struggles with unintended consequences.
Several cities have already proposed, and then backed down from, similar plans, in response to pressure from financial institutions. Does Richmond have what it takes to enact this approach and stay the course? Some argue it does, thanks to strong grassroots support from the city and social justice organizations, along with the sheer force of will represented by the mayor, a member of the Green Party who firmly believes in social justice and progressive politics (in fact, she’s been accused of pushing this agenda less in the interest of the city and more in the interest of a personal vendetta against the financial industry).
If Richmond does pull it off, other cities are going to take note, and may initiate similar programs to address foreclosures in their neighborhoods. The result could be some explosive changes to the real estate and financial industries in the United States, something large mortgage institutions desperately don’t want…so prepare for some heavy-duty lawsuits.
Photo credit: kris krüg.