SAN FRANCISCO, Sept 20 (Reuters) - Richmond, California'splan to use eminent domain to seize "underwater" mortgages andmake them more affordable could backfire on its finances,Moody's Investors Service said on Friday, adding the plan is a"credit negative" for the city.
Eminent domain allows governments to acquire property forpublic purposes such as building roads, but Richmond's citycouncil last week voted to potentially use it to acquiremortgages to prevent more foreclosures.
"The eminent domain program is credit negative for the citybecause it will likely lead banks to raise mortgage interestrates and reduce mortgage availability, which will in turn limitthe growth of property values and related taxes," Moody's saidin a report.
Moody's has an 'A1' issuer rating on Richmond, one of theSan Francisco region's poorest cities and the first one in theUnited States to embrace eminent domain to acquire underwatermortgages.
Supporters of the plan in Richmond say roughly half ofmortgage borrowers in the city of about 105,000 residents haveunderwater mortgages, or owe more on the loans than theirproperty is worth.
Richmond's plan, crafted by investor group MortgageResolution Partners, provides for the city to use eminent domainto acquire mortgages if investors holding them turn down itsoffers to buy homes at a deep discount to the value of theloans.
The city has already made offers for more than 600delinquent and performing mortgages. Critics say that shows thecity is lending its eminent domain power to Mortgage ResolutionPartners to split profits from refinancings with it.
The plan's supporters say it would help keep more borrowersin their homes, averting defaults and blight from foreclosures.That should help Richmond's housing market and by extension thecity's finances, they add.
Moody's view of the potential effect on Richmond's housingmarket reflects the mortgage industry's view. Moody's predicted"Lenders will factor in the additional risk by raising mortgageinterest rates or decreasing their availability."
That would reduce demand for housing in Richmond and slowits rising home values, Moody's said.
Mortgage brokers warn that forcing mortgage investors totake a loss so Richmond can modify home loans could also scarelenders out of the city. "If you give lenders a lose-loseproposition, they're gone," said Lou Barnes, a mortgage brokertracking Richmond's plan from Boulder, Colorado.
Richmond risks becoming "toxic" for lenders, said RickSharga, an executive vice president at online real estatemarketplace Auction.com. "It adds an element of risk that'snever been factored into a mortgage contract before," he said.
Richmond's city council voted 4-3 last week to approve theplan but would need to vote 5-2 for eminent domain actions. Ifthere are no willing sellers, courts could set prices exceedingoffers by Richmond, potentially undermining its program'sfinancial rationale, Moody's said.
Investors holding mortgages targeted by Richmond show nosign of accepting its offers to buy homes financed by the loans.The investors, through their trustees, tried to block Richmondin U.S. District court in San Francisco, but a judge there onMonday dismissed the case, saying their suit was premature.
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