Federal Housing Agency Threatens Municipalities on Mortgage Eminent Domain

Richmond is the first to push forward with the plan, also being debated in cities across the state and nation. Richmond wants to require lenders and investors to sell underwater mortgages at a deep discount. The city would then refinance borrowers into more-affordable mortgages.

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North Las Vegas, Nev., has also approved a similar plan, and Seattle and Newark are also considering adopting the measure, according to Mortgage Resolution Partners.

That makes the working-class city of Richmond, situated just north of Berkeley in the East Bay, an important test case. The hardscrabble town of 106,000 people has sizable black and Latino populations and was hard hit by the housing crisis, with homeownership rates well below the national average.

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Cornell Law professor Robert C. Hockett, who advised Mortgage Resolution Partners on the proposal, said that the federal housing finance agency was acting outside of its authority by issuing its threats.

"How many times must it be repeated that principal write-downs on deeply underwater mortgage loans increase the value of the loans -- even while keeping homeowners in their homes and communities intact?" Hockett said. "This is not only illegal, it is disgusting."