The city of Richmond, Calif., has offered to purchase 624 home loans from mortgage servicers and trustees and is moving forward with a plan to restructure the underwater loans or potentially seize them through eminent domain.

"We're not going to back down," Mayor Gayle McLaughlin told reporters on a conference call Tuesday. "We feel it's the responsibility of the servicers and banks to correct this."

On Monday, City Manager Bill Lindsay sent two-page "offer letters" to roughly 32 mortgage servicers and trustees requesting that the city be allowed to buy underwater home loans at reduced prices. If the servicers balk, city officials say they will seek to seize the properties. The New York Times first reported the story on Monday.

The city has set a deadline of Aug. 13 for servicers and trustees to accept offers on 624 loans that were appraised on June 30, McLaughlin said. The Richmond City Council is expected in September to either approve the offers to restructure the loans or to determine whether to seize the homes through eminent domain.

A key issue in any legal fight would be how bond investors, including Fannie Mae, Freddie Mac and Federal Home Loan Banks, which are investors in private-label mortgage-backed securities would be compensated for such seizures. Such investors have been vehement in their opposition to similar plans floated by other cities.

Earlier this year, the California cities of San Bernardino, Fontana and Ontario dropped their plans to use eminent domain to seize underwater homes, citing a lack of community support, while Chicago's mayor vetoed a similar plan last year.

But in Richmond, a largely minority community where roughly 46% of borrowers owe more on their mortgages than their homes are worth, city officials have broad support for their plan.

Amy Schur, a campaign director for the Home Defenders League, a national coalition of 30 nonprofits, said homeowners got behind the plan at a town hall meeting in June when her group developed a statement of principles that "no homeowner would be worse off" from the process.

She also said that any home loan backed by Fannie Mae or Freddie Mac that meets the qualifications for refinancing would be allowed in the city's principal reduction program "because anything short of that would involve redlining against the communities."

In Tuesday's conference call, Mayor McLaughlin said city residents support her plan because many of them feel they were trapped into loans they could not afford. "Many of these people were directly targeted by subprime mortgages and predatory lending practices," McLaughlin told reporters. "We have neighborhoods that are suffering blight, which creates crime."

"The ball is in their court right now — the servicers and trustees need to make the right decisions and negotiate the sale of these loans," she added. "They are holding on to loans that they have been unable or unwilling to fix. We are willing to take those loans off their hands, purchase them at a fair price and save the city from the devastation that is happening."

Richmond laid the groundwork for the plan in April when it hired the San Francisco venture capital firm Mortgage Resolution Partners to acquire and restructure the loans. The firm, which would earn a fee for each loan it restructures, also was behind other cities' efforts to seize underwater loans through eminent domain.

Graham Williams, the chief executive of Mortgage Resolution Partners, said on the conference call with reporters Tuesday that most of the loans targeted for purchase are interest-only, low documentation loans with "a very high likelihood of default." One of the solutions is to simply refinance the underwater mortgages using a program for loans that are backed by Fannie Mae and Freddie Mac, he said.

But the Federal Housing Finance Agency has threatened to take action against municipalities that attempt to use eminent domain to refinance underwater mortgages.

Tom Deutsch, executive director of the American Securitization Forum, called the city's actions "unconstitutional and dangerous."

The securitization industry has threatened to file suits if eminent domain is used to seize loans from private investors. The industry has argued that doing so would jeopardize the ability of banks to lend in those communities because of the added legal costs to investors of defending against eminent domain.

"Both federal and California law clearly show that this scheme is illegal," Deutsch said. "Potential homebuyers in Richmond will have to pay more for mortgages to cover the risk of eminent domain or simply not be able to obtain a loan at all."

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