A row is raging over a controversial proposal by a Californian city mayor to seize distressed properties held by banks.
Mayor Gayle McLaughlin, of Richmond, has put forward a plan to buy banks and other owners fair market value for empty properties – but backed that with a threat to seize the homes and business premises if they refuse the offer.
Lawyers and the banks are challenging the city’s legal position and the two big mortgage lenders Fannie Mae and Freddie Mac have suggested that they will not secure loans against the properties because of doubts over who may hold the titles.
The city wants to restore ‘equity’ in the property market with the deal.
But the banks are finding this is one offer they want to refuse as they can make more money holding property while prices start to rise.
Legal challenge
Now, the title holders have mounted a legal challenge in the federal courts to block the city from grabbing the assets.
McLaughlin argues the banks caused the property crash and should accept the resolution to put matters right.
However, the bank loans were underwritten or secured by pension and investment firms who are far less happy about the arrangement.
Lawyers argue that their claim against the property surpasses the city ordinances to seize the properties and doubt the city will win in court.
Another issue the city must overcome is that although many properties are in the early stages of distress or foreclosure, the mortgages are current with the borrowers making payments and not in default.
Negative equity
The issue looks like having too many strands for the mayor’s plan to come together just how he would want, and even if it did, there are doubts that many properties would be affected.
The city has earmarked 624 mortgaged properties for seizure. Three have mortgages of $800,000 or more, making them $1 million homes at the peak of the housing boom.
All the properties have been valued by an independent appraiser, who gives an opinion about the likelihood of default on the mortgage and the loss the bank or lender will have to cover.
Many of the homes are ‘under water’ or in negative equity, which means the homes are worth less than the loans against them.
The city suggests fair market value on a $300,000 loan is around $160,000, so is seeking to buy the properties at well below their previous values.
