Condeming Underwater Mortgages: Another Look at the Legality of it

by Nossaman LLP

OK, I'll admit it.  A year ago I thought this whole condemnation-of-underwater-mortgages thing would die off pretty quickly.  I predicted we'd never see any large-scale condemnation effort.  So far, I've missed badly on the first prediction -- but it remains to be seen whether I'm right on the second one. 

To date (unless I've missed something), not a single condemnation action has been filed anywhere in the U.S. to condemn an underwater mortgage.  But the concept certainly has not disappeared quietly into the night.  Instead, some cities continue to pursue the idea. 

One in particular, Richmond, California, seems intent on following through with condemnation.  The city has committed to pursuing the plan, and it has apparently made more than 600 offers to acquire performing, underwater loans under threat of eminent domain. 

As my colleague Bernadette Duran-Brown reported recently, even the idea of moving forward triggered litigation from the finance community, but the court rejected the claim as unripe.  This does not mean Richmond's plan is legal; it just means the courts won't rule on its legality until Richmond actually tries to condemn something (which makes pretty good sense to me). 

So where does this leave us?  Assuming Richmond does adopt resolutions of necessity and file condemnation actions, we can assume there will be right-to-take challenges, which will raise a number of thorny legal issues, including some largely forgotten constitutional claims like the Dormant Commerce Clause.  (Don't worry.  I'm a lawyer who studied this stuff in law school, and even I needed to check the Wikipedia cite to remember what the heck "Dormant Commerce Clause" means.)  

Fortunately, Mike Konczal has published a pretty detailed analysis of all of these issues in a recent Washington Post Wonkblog article, Is Richmond’s mortgage seizure scheme even legal?  I won't give away all his secrets, but for those unwilling to click over to read the actual article, the bottom line is that Mr. Konczal concludes that the plan is legal, and will survive each of these anticipated challenges:

  • Eminent domain cannot be used on something intangible like a mortgage;
  • Richmond lacks the power to condemn mortgages because they do not actually exist within Richmond (unlike the underlying property, which does lie within Richmond's territorial condemnation authority);
  • Richmond's plan fails to qualify as a public purpose; and
  • Richmond hasn't offered just compensation.

Mr. Konczal's view is that the courts will reject each of these challenges and allow Richmond to proceed.  He also rejects the idea that the plan will destroy the underlying housing market, agreeing with Professor Dreier, a professor at Occidental College, that "stabilizing the mortgage market is far more important in making credit widely accessible."  

As I've said in the past, I largely agree with Mr. Konczal.   I think the plan will likely survive legal scrutiny, though I think courts will struggle with some of the issues and that it will end up taking at least one Court of Appeal decision before the issues are settled.  (For those who want to revisit my early analysis, I wrote three posts on the subject in July 2012:  one describing the concept; one about legality; and one about economics.) 

But I do disagree with Mr. Konczal on his ultimate conclusion.  He appears convinced that the plan will work economically.  In other words, he agrees with the contention that "fair market value" will allow the city to acquire the mortgages at far less than the underlying homes are worth -- enough less to put a new loan on the property at no more than the home is worth, while leaving a delta between the condemnation cost and the new loan sufficient to pay all transaction costs (including attorneys' fees) plus the fee to Mortgage Resolution Partners. 

To me, this remains the plan's major stumbling block.  I have trouble believing that this could ever pencil.  Just to use the Richmond example, let's use Mr. Konczal's figures:  "The median sale price of housing fell from about $450,000 in January 2006 to $220,000 today."  In other words, the median value of the homes underlying these underwater mortgages is $220,000.  If the homes were purchased in January 2006, with twenty percent down, the mortgages started at $360,000.  That $360,000 loan would still have an outstanding balance of around $318,000.  In other words, such an owner would be almost $100,000 underwater. 

So the problem is clear, but how does it play out in an eminent domain case?  I still think the lenders will be able to argue that the loans (remember, they are all performing loans) are worth at least as much as the underlying home.  If this is true, the plan is a financial disaster. 

But let's assume for a minute that the loans are only worth 80% of current home value.  So the $318,000 loan is worth only $176,000.  Richmond condemns the loan for $176,000 and puts a new loan on the property.  Let's even assume that the new loan is at 100% loan-to-value, or $220,000 (which is NOT how the program is advertised). 

That leaves $44,000 left over.  From that, Mortgage Resolution Partners takes its fee, previously identified as $4,500.  Round it off and we have $40,000 left to pay for the condemnation action -- an action that will likely include a right to take trial and a jury trial on just compensation.  Now I'm not sure what lawyers are going to try these cases or what their hourly rates are, but I am pretty confident that no city can find lawyers to conduct both a right-to-take trial and a just compensation trial, including hiring appropriate experts, for $40,000 or less.  And as soon as one concedes that it will cost more than $40,000 in transaction costs, the plan fails economically. 

Hey, I might be proven wrong again; after all, I was the one telling you a year ago that this idea would simply die off.  But for now, I remain exceedingly unconvinced.  As always, time will tell.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Nossaman LLP | Attorney Advertising

Written by:

Nossaman LLP

Nossaman LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.