In Richmond, Calif., officials are preparing to take unprecedented action to help underwater homeowners. Mayor Gayle McLaughlin is seeking to halt foreclosures that she says are devastating the community by using eminent domain to seize underwater mortgages from Wall Street firms and investors to keep residents in their homes. This would make Richmond the first U.S. city to use this power to help refinance homes. Steven Gluckstern, chairman of San Francisco private investment firm Mortgage Resolution Partners (MRP), first proposed the eminent domain plan and is now working with the city to implement it.
The city and Gluckstern pursued 624 mortgages, choosing homes with a very specific, complicated loan known as private label securitized mortgages. These types of mortgages have been sold from the original lending institution, bundled with other loans in trusts, and then sold to private investors. Unlike a traditional loan between a bank and a borrower, PLS mortgages make it difficult for homeowners to know who they are supposed to negotiate with to reduce their loan. There are currently about 4.5 million private PLS mortgages, half of which are underwater. Although investors attempted to file a lawsuit against Richmond and MRP, a federal judge in San Francisco has dismissed the suit, saying the case was filed prematurely.