STEVE INSKEEP, HOST:
Today, a federal judge hears arguments over a radical plan to help homeowners. The city council of Richmond, California is determined to keep residents in their homes by gaining control of underwater mortgages. Those are mortgages worth more than the properties have been since the great recession.
RENEE MONTAGNE, HOST:
Banks have been reluctant or unable to rework the terms or sell them, so the city that's across the bay from San Francisco says it's prepared to become the first community to seize the mortgages using the power of eminent domain. NPR's Richard Gonzales picks up the story.
RICHARD GONZALES, BYLINE: I'm standing outside city hall in Richmond. More than 100,000 people live in this California city and it's got a reputation as a rough blue collar town. Crime and high unemployment are no strangers here, but this has always been a place where young families could find an affordable home. Then came the housing crisis and now Richmond city officials say more than half of the homeowners here are underwater.
And that's why inside city hall, Green Party Mayor Gayle McLaughlin says the threat of more foreclosures is bad news for the entire city.
MAYOR GAYLE MCLAUGHLIN: When homes go into foreclosure on a block, property values around the entire neighborhood go down, so we don't want to see our neighborhoods continue to be destabilized.
GONZALES: So in July the city sent a letter to the trustees of more than 600 mortgage holders offering to buy those loans at fair market value. Mayor McLaughlin.
MCLAUGHLIN: And if they refuse, if they, you know, choose not to cooperate with the city, then we have the option of using eminent domain.
GONZALES: Traditionally, eminent domain is used when a city wants to build a new road, school or mall. The idea of using it to seize underwater mortgages comes from a San Francisco group called Mortgage Resolution Partners, or MRP. The chairman of MRP is Steven Gluckstern.
STEVEN GLUCKSTERN: I tell you, it's not so much for using eminent domain. It's a plan to help reduce principle. This is a principle reduction plan.
GONZALES: Here's how it would work. The city would offer to buy an underwater loan or seize it, paying at a discount of the fair market value. It would then help the homeowner refinance at a price slightly higher than what the city paid. That profit would be split among the city, the investors who bought the loan, and MRP, which found the investors; in other words, Steven Gluckstern and his partners.
GLUCKSTERN: What we thought was if you could actually find a way to keep people in their homes to prevent another between three and nine million foreclosures, which are coming as sure as we're sitting in this room here, that we'd be rewarded if we did that.
GONZALES: But not long after Richmond made its offer to buy the mortgages, the financial industry struck back. Two banks, Wells Fargo and Deutche Bank, sued the city and Mortgage Resolution Partners, accusing both of trying to profit from the city's power of eminent domain. Wall Street has weighed in too. Timothy Cameron heads the asset management group for the Securities Industry and Financial Markets Association.
Cameron calls the Richmond plan illegal and says it will just make mortgages more expensive.
TIMOTHY CAMERON: You'll be forcing private investors who allocate their resources to account for a risk that heretofore was unaccounted for. As a result, the premiums for mortgages will go up.
GONZALES: That argument holds sway with some Richmond residents who've packed this week's city council meeting. Longtime resident Joshua Genzer warned that investors will shun Richmond.
JOSHUA GENZER: If we don't cancel this program, it is going to be impossible to get credit here in the city of Richmond. And believe me, there's not going to be a job created in the city. There's not going to be a house improved. There's not going to be a lot developed in the city of Richmond if we cannot get financing.
GONZALES: But other Richmonders encouraged the council to press on with the plan. In the end, the council voted four to three to do that, but that's far from the last word. The council will need five votes to actually seize a mortgage. Richard Gonzales, NPR News, San Francisco. Transcript provided by NPR, Copyright NPR.