Richmond, California, has announced that it means to go ahead with the harebrained scheme of using eminent domain to acquire mortgages on “underwater” homes at bargain prices, thereby screwing the lenders, and renegotiating loan balances with the owner/occupants of those homes. The idea is that the homeowners who signed contracts to make higher monthly payments would now be able to pay lower ones, and continue in lawful occupancy of those homes rather than losing them by foreclosure. That is to say that the taking of the “underwater” mortgage and converting it into one providing for lowered loan balances negotiated after the taking, would allow the owners/borrowers to reap a windfall — i.e., their monthly payments would now be based on the new, lowered loan balance, with their [former] lender taking what these folks call a “haircut” — i.e., a screwing.
For the last few days, the internet has been full of news items dealing with that proposed scheme. But the bad news is that most people writing on that subject talk about the right to take, and don’t seem to have a clue that the would-be takers of these mortgages — actually deeds of trust; we don’t use mortgages in California — will have to pay just compensation, i.e., fair market value, not some bargain basement figure pulled out of thin air. And by California constitution and statute, you have to keep two things in mind. First, the “just compensation” called for the state constitution has to be “first” paid — in full, and up front, that is — before any taking can occur (Cal.Const. Art. I, Sec. 19). Second, by state statute, the condemnor has to pay “fair market value” which is further defined by statute as “the highest price” (not a bargain price), that a willing but unpressured buyer would voluntarily pay to and be accepted by a willing but unpressured seller on the date of value, giving due consideration to the property’s potential uses, including its highest and best (which is to say, its most profitable) use. See Cal. Code Civ. Proc. Sec. 1263.320.
We note that if this harebrained scheme comes a’cropper, as it likely will, for one reason or another, it won’t be the first time Richmond got its greedy fingers burned playing with eminent domain abuse; see Richmond Elks Hall v. Richmond Redevelopment Agency, 561 F.2d 1327 (9th Cir. 1977), one of the leading cases in which the court took a dim view of a city trying to use its power of imminent eminent domain to blight private property, and then take it at its depressed value. Didn’t work out.
Are those folks trying it again? We don’t know for sure. But it seems clear that they intend to acquire “underwater” deeds of trust at below-market prices. So says the New York Times. Will it fly? Will the courts go for this sort of scam? We’ll have to wait and see, but we believe that not even California courts will stand still for that. Why not? Because under our law, if the condemnor tries to lowball too much, and makes an unreasonable pre-trial offer, it may have to pay the condemnees’ attorneys’ and appraiser’s fees, plus other litigation expenses, on top of the “just compensation” required by the constitutions. And, of course, any diminution in value brought about by the the market’s reaction to the imminence of the condemnation, cannot be considered in determining fair market value. The property has to be valued as if unaffected by the condemnor’s plans or by any preliminary steps taken toward the condemnation. Cal. Code Civ. Proc. Sec. 1263.330.
Then there is the little matter of partial takings. No, not parts of mortgages, but rather the fact that a lot of the “underwater” deeds of trust (or mortgages) have been bundled as security for bonds, and we have trouble visualizing how a condemnor in one of these cases would (or could) pluck a specific ”underwater” deed of trust from such a “bundle” and value it alone, without simultaneously lowering the value of the deeds of trust remaining in the “bundle” that forms security for the bond. If attempted, that would likely call for severance damages payable to the bond holders for the diminution in the value of what remains of their bond(s) after the “plucking” (the partial taking of the bundle).
Thinking about some of these problems gives us a headache, and we are grateful that we are retired and can now view all that as a spectator sport.
On the other hand, if this stuff proceeds as proposed, there will be lots of work for condemnation lawyers, or worse, for big-shot Wall Street lawyers who may not really know much eminent domain law, but sure know how to litigate and swamp their opponents with paper. And they are amply financed to put up one hell of a fight.
We can’t wait.
Update. For the Los Angeles Times take on the status of the “underwater mortgage” caper, see Alejandro Lazo, Proposals to Seize Loans Gain Traction, Aug. 7, 2013, at p. B1. In the meantime “rising [home] prices have feed many homeowners from negative equity positions” so the pool of potential customers (and victims) is shrinking.