The old proverb “the enemy of my enemy is my friend” suggests that two parties who don’t particularly like each other can still unite to battle a common enemy. Apple and Microsoft teamed up against Google; Yankees and Red Socks fans bonded to boo Alex Rodriguez; and banks and credit unions recently joined to fight the Richmond, Calif., plan to use eminent domain to seize mortgages. Banks and credit unions became “frenemies” on Aug. 30, 2013, when the ABA, California Credit Union League, and several other trade associations, including the California Bankers Association, filed a joint amicus brief criticizing Richmond’s plan to use eminent domain to force the refinancing of select “underwater” mortgages.
Eminent domain is the government seizure of private property for a public purpose, and is generally used to confiscate land for projects, such as highways and schools. By allowing homeowners to reduce their underwater mortgage debt to less than the current value of their properties, Richmond claims the program will spur economic development by limiting foreclosures and reducing property abandonment. Courts have held the Takings Clause of the Fifth Amendment permits the government to confiscate private property for “public use” if the owner is paid fair market value.
Richmond offered to purchase the nondelinquent, underwater mortgages owned by private trusts for 80% of current home value. The city will use private investment capital from its partner, Mortgage Resolution Partners (MRP), to finance purchases from approximately 31 trustees. For example, the mortgage of an $800,000 house that Richmond values at $400,000 would be purchased for $320,000. Richmond would reduce the homeowner’s mortgage to $380,000, and the remaining profit—approximately $60,000—would be divided between Richmond and MRP when the mortgage is resold.
If trustees refuse a city offer, Richmond will use eminent domain to force a sale. Both banks and credit unions contend that Richmond’s plan is an unconstitutional, profit-making scheme that will not benefit the public.
In Kelo v. City of New London, the Supreme Court determined that a city could use eminent domain to seize and sell private property to private developers, where the seizures were part of an economic development plan that would benefit the public. In Kelo, the Connecticut city proposed a project that would create jobs and benefit the community. In contrast, Richmond’s claim that its plan will reduce foreclosures appears disingenuous, because delinquent mortgages on the brink of foreclosure do not qualify. The city cherry-picks the most valuable mortgages and demands they be sold at less than market value so MRP can earn a profit.
MRP is promoting this program to several other cities. To combat this, Wells Fargo and 30 other trustees sued to stop the program, officially making Richmond and MRP the nemesis that spawned bank and credit union cooperation. A few weeks later, ABA and the largest state trade association for credit unions joined the same amicus brief. Who could have predicted that eminent domain would turn enemies into frenemies?