My USA Today Column on the City of Richmond’s Plan to Condemn Mortgages

The USA Today website just published my column criticizing the Richmond, CA’s plan to condemn mortgages:

The City of Richmond, California is threatening to use eminent domain to condemn over 600 mortgages on homes that are now worth less than the outstanding debt on the mortgages themselves. The city plans to write down the value of the mortgages and transfer most of the value to the current owners of the homes.That’s a move that could have nationwide implications for homeowners and those who aspire to join them if the idea spreads….

Various banks and investors have filed lawsuits arguing that the Richmond policy is unconstitutional. Some of their arguments have merit… Advocates claim that the program will actually pay for itself. But the idea that the city will be able to strip distressed mortgages from one set of owners and sell new smaller mortgages to investors at a profit is speculative at best. If the rosy scenario doesn’t materialize, taxpayers will be left holding the bag; future home buyers will suffer even if it does….

[T]he Richmond takings probably won’t be invalidated because they transfer property to private interests, even though the Constitution only allows takings that are for a “public use.” But Richmond’s plan has another constitutional defect: undercompensation. The Fifth Amendment requires the government to pay “just compensation” when it condemns property, which the Supreme Court has long interpreted as “fair market value.”

The City is offering to pay lenders 80% of the home’s currently assessed value, irrespective of the amount of money still owed on the mortgage, which is often far more than that. For example, if a home is currently worth $200,000 on the open market, and is mortgaged for a total of $400,000, the city would pay lenders $160,000. Even if the owner defaults, the lender can probably recover more than $160,000 through a foreclosure sale. And most of the mortgages Richmond seeks to condemn are not in default, which makes their value much higher. These are only very rough, simplified calculations. Nonetheless, it is likely that Richmond’s valuation formula gives lenders much less than fair market value.

Even today, victims of eminent domain are often undercompensated. If the courts uphold Richmond’s plan, that problem will get worse. If on the other hand, the city fixes this problem by increasing compensation, that would increase the burden on taxpayers and further undermine hopes the program would pay for itself….

I wrote about various aspects of the plan in more detail here, here, and here. Gideon Kanner has more details on the undercompensation problem and the way it is likely to drive up the cost of the plan here.