Expect Richmond’s eminent domain mortgage ploy to backfire

Los Angeles attorney Gideon Kanner has for 40 years been a fierce opponent of the abuse of eminent domain law.  His credentials are so extensive that it is impossible to list them all here.  I always found his opposition to “low ball” compensation to property owners to resonate with my experience as a former chief real estate appraiser for a large public utility.  Kanner says that the city of Richmond’s actions to condemn 600 “underwater mortgages” using eminent domain may backfire on the cash-strapped city.

Kanner’s recent analysis  — “Stop the BS About Underwater Mortgage Eminent Domain Takings” — on his website Gideon’s Trumpet tells a different story than what most of the public is reading in the mainstream media. Kanner calls most of the people writing on the subject “clueless” for several reasons.

What clueless media never explain

First of all, Kanner points out that the city of Richmond will have to pay just compensation to lenders — not some “bargain basement figure pulled out of thin air” so that the city and its mortgage carpetbaggers can reap a windfall.  And this compensation has to be deposited in full at the start of the eminent domain action.  Citing Article 1, Section 19 of the California Constitution, Kanner says: “the ‘just compensation’ called for in the state constitution has to be ‘first paid’ – in full, and up front, that is – before any taking can occur.”  Apparently, cash-strapped Richmond is going to borrow the money from its mortgage advisors to make this upfront payment.  This means the city will have to go into more debt.

As pointed out by me elsewhere, this will mean the city will have to pay back its mortgage consultants’ investors instead of the investors of the banks that hold the mortgages.  Whether the courts would allow mortgage lenders to be stiffed to enrich mortgage consultants working for cities is doubtful.

Secondly, Kanner says Richmond will have to pay “fair market value” which is defined as the “highest price” and not some bargain price coerced from a seller under duress of the eminent domain law.  In other words, Richmond and its mortgage partners cannot pay a low-ball price to make a profit for themselves on the backs of lenders.

Kanner says that if Richmond’s “harebrained scheme becomes a’cropper, as it likely will, for one reason or another, it won’t be the first time Richmond got its greedy finger burned playing with eminent domain.”  Kanner cites the 1977 case of Richmond Elks Hall versus the City of Richmond Redevelopment Agency (561 F. 2d 1327 – 9th Circuit).  This case is one of the leading cases of eminent domain abuse in the state wherein the courts ruled against a city trying to pick up properties on the cheap.  The court rejected Richmond’s low-ball compensation in that case.

Eminent domain arbitrage: buy low, sell high

According to the compensation formula reported by the city’s mortgage advisors, the city can only make mortgage eminent domain work by arbitraging –– buying the mortgages at the lowest price and then allowing its mortgage middlemen to sell them for the highest price.  Courts have historically rejected the tactic of cities trying to to downzone a property so it could be condemned on the cheap.  The same principle of banning municipal arbitraging would likely apply to the city of Richmond.

Richmond would also have to pay damages to lenders for any losses to their whole loan portfolio.  Kanner says that Richmond’s scheme to take only mortgages where the homeowners are making payments would leave lenders with only bad mortgages that are in foreclosure.  Thus, Richmond would likely have to pay damages.  In my experience as an appraiser for a large public utility, sometimes damages can exceed the whole value of the property.

Richmond will also have to pay its own attorney fees.  And if the city loses each court case, it will have to pay the lenders’ attorney fees.  It typically costs a minimum of $50,000 for legal representation in eminent domain cases. Damages and attorney fees alone could eat up all the profit that Richmond and its mortgage consultants expect to make.

Where is the condemnation of condemnation?

Kanner views the upcoming eminent domain trials as “spectator sport” brought about by harebrained academics, greedy mortgage consultants, “big shot lawyers” who are ignorant about eminent domain law, and cash-strapped cities who hope to plug holes in their pension plans with ill-gotten gains from eminent domain.  The city of Richmond thinks it would reap $48 million under this scheme. To imagine what Richmond is doing imagine the city of Bell in Los Angeles County using eminent domain to fund fat-cat salaries, perks and benefit plans for the City Council and its cronies.

Mortgage eminent domain in Richmond is likely to backfire in a big way.  Are elected leaders in Richmond prepared for recall elections when all this backfires on them?  Stay tuned.