How Mortgages Were Picked for Richmond’s Eminent Domain List

By Mark Andrew Boyer, Richmond Confidential

When smooth jazz recording artist Morris LeGrande heard about Richmond’s unprecedented plan to help homeowners refinance their mortgages, it was music to his ears. “Sign me up,” he says. “I’m 100 percent on board.”

Even though he was eager to be a part of the program, LeGrande never had an opportunity to sign up. Others also wondered why they were not included. Now Richmond officials have revealed the criteria they used to pick the underwater mortgages they’ve targeted for assistance.

Almost half of all mortgages in Richmond are underwater, according to Zillow, including LeGrande’s. Although the balance on his mortgage is more than $400,000, LeGrande’s home was recently assessed at just $131,000, and in 22 years he will have to make a balloon payment of about $194,000.

“It’s a real treadmill type of position,” he says.

In July, Richmond officials sent letters to 32 banks and mortgage companies offering to buy 624 underwater mortgages at steep discounts. If the banks refuse to sell, the city is threatening to use the power of eminent domain to acquire the mortgages and refinance them at more manageable rates.

The scheme has sparked a national debate about the use of eminent domain, but until now Richmond officials haven’t shed much light on how they selected the list of 624 mortgages.

The process of selecting which mortgages to include in the program was far from arbitrary, says Steven Gluckstern, chairman of San Francisco-based investment firm Mortgage Resolution Partners, which is partnering with Richmond on the project.

The underwater properties the city targeted had to meet three criteria: First, they had to be owner-occupied homes – not rental properties; second, they had to have mortgages that were worth less than the assessed value of the home; and third, the mortgages had to be owned by private-label securities. A private-label security is a type of financial instrument that cannot be sold or modified, which means it’s almost impossible for homeowners to get a loan adjustment.

Richmond went after properties that met these criteria because they were the most vulnerable and because they are eligible for refinancing through state and federal programs.

“If you try to boil the ocean you inevitably fail,” says Gluckstern, explaining why Richmond used that set of criteria to create the list of mortgages. “So you start with a small body of water, and you get that boiling, and then you think about what else.”

The proposal has come under scrutiny in recent weeks because the list of mortgages the city made offers on includes several pricey homes located in tony neighborhoods. A list of the mortgages, obtained from the city of Richmond through a public records request by financial analyst Marc Joffe, reveals that at least two of the mortgages were purchased for over $1 million, and 121 loans were purchased for more than $500,000. If the city is truly concerned with alleviating blight, it should focus exclusively on low-income neighborhoods, argues Joffe, an outspoken critic of the program.

Although some expensive homes were included in the initial list of mortgages the city offered to purchase, Mayor Gayle McLaughlin says the Richmond City Council will make the final decision before making any transactions. So far, the only thing Richmond officials have done is send offer letters to loan servicers. If the city succeeds in acquiring the loans, McLaughlin says the city will then contact each individual homeowner to present them with the option to refinance.

“The largest amount of risk from underwater homes is that they default and cause neighborhoods to become more and more troubled,” says McLaughlin. “This isn’t just one home, whether it’s an expensive home or not.”

Homeowners weren’t initially notified of the city’s plan to obtain their mortgages, and McLaughlin says the city hasn’t done any outreach about the program yet. But the city has launched a website, richmondcares.com, where Richmond residents can enter their name and address to find out if their mortgage was included in the initial batch of 624 offers.

LeGrande, for one, is hoping the plan succeeds.

“If this completely fails, I’m no worse off than I was,” he says. “It’s the first time in my adult life that I’ve actually seen a government official go to bat for the people.”