After a marathon hearing that wrapped up in the wee hours of Wednesday morning, the City Council of Richmond, Calif., voted to allow the use of eminent domain to seize underwater mortgages, becoming the first city in the nation to take such a concrete step toward the novel and risky strategy for helping people avoid foreclosure.
The night of impassioned debate — featuring six feuding council members, a mayor firmly committed to the plan, and several dozen speeches from the public — showed the power of litigation to sow doubt, and the power of personal stories to stir hearts. [...]
As the meeting’s official business commenced, Richmond’s well-respected city manager Bill Lindsay tried his best to explain. He laid out the need for a creative solution, cautioned that he’d try to avoid using eminent domain if alternatives were available, and described the risks. Among them: The bond market is already miffed at the city for trying to stiff the investors who own Richmond’s mortgages. When the city went out to issue $34 million in bonds, nobody bought them, forcing the city to withdraw.
“When investors have choices in the market, they tend to choose the safe, plain vanilla option, rather than an option that require them to research and fully understand the story,” Lindsay said. “Those bonds are called ‘story bonds,’ and investors tend to avoid them.”
Lindsay says he heard from a few municipal finance experts, including former Goldman Sachs banker Wallace Turbeville, who had earlier defended the plan and wrote a letter saying that any nervousness about eminent domain plan on the part of investors was “baseless” and should fade away. But as long as Richmond is the only city pursuing the option, it becomes much easier for bond-buyers to punish.