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December 17, 2014

San Francisco Considers Eminent Domain to Reduce Foreclosures

San Francisco is the latest city looking to employ the powers of eminent domain to help homeowners avoid foreclosure, Bloomberg reported Dec. 7. The city would use eminent domain to seize loans of borrowers who are underwater on their mortgages.

While some officials believe the move could raise borrowing costs and discourage investment in the city, officials are looking for approval to sell around $400 million of general-obligation bonds in January so they’d be able to refinance debt on seized mortgages.

“We’ve seen a large exodus of working-class and middle-class households from the city, and I wanted to look at a tool to support these homeowners,” John Avalos, the San Francisco supervisor who made the proposal, told Bloomberg. 

Housing affordability has become a major issue in San Francisco with the growing technology industry driving up home prices and making homeownership exorbitantly expensive for the middle class. Should the city succeed in its proposal, it will be on the same footing as the nearby municipality of Richmond, which also is pursuing partners in an eminent domain effort.

In October, San Francisco supervisors asked the city controller to investigate partnering with Richmond, which voted to adopt an eminent domain plan in 2013 for the purpose of seizing loans and modifying them for underwater and troubled borrowers.

Banks are resistant to these eminent domain procedures, and Wells Fargo, Deutsche Bank and Bank of New York Mellon Corp. have all sued Richmond on behalf of investors holding securities backed by mortgages in the city.

The city controller advised San Francisco’s Board of Supervisors that an eminent domain program would “likely be negatively perceived by financial markets, insurers, other financial intermediaries and potential investors in the city’s bonds,” Bloomberg reported. Thus, the city would have to sell debt instead of making a competitive offering in order to finance the purchase of troubled mortgage loans.

At present, San Francisco is the nation’s most expensive housing market with a median home price of $975,000.

Bloomberg reported that around 90,000 city residents hold mortgages, and 10,000 of those involve loans bundled into securities for sale to investors. Eight of those loans are underwater, amounting to less than 0.1 percent of owner-occupied mortgages, and because the pool of impacted mortgages is so small, it should not materially increase San Francisco’s bond costs or have any real effect on the market. 

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