By Jim Christie
SAN FRANCISCO (Reuters) - As Richmond, California, moves forward with a plan to help struggling homeowners by using its power of eminent domain to seize underwater mortgages, the list of those concerned about it is growing - and now includes the pension fund for many of the very same city workers pushing the plan.
The $268 billion California Public Employees' Retirement System, the nation's largest public pension fund, joins banks and other investors in worrying that Richmond's plan will undermine the value of its holdings.
Calpers holds about $11 billion in income-producing mortgage-backed securities, though it calculates it has just $27,000 in exposure to mortgages targeted by Richmond.
"We are sympathetic to homeowners but as fiduciaries our focus must be in the best interests of our members," Calpers spokesman Joe DeAnda told Reuters in the fund's first public statement on Richmond's plan. "We are watching the issue closely and have some concerns about the precedent this may set and the impact to investors."
Meanwhile, the Service Employees International Union, which represents 452 of Richmond's roughly 900 employees, most of whom are members of Calpers, is a full-throated backer of the first-of-its-kind eminent domain plan.
SEIU President Mary Kay Henry said in a statement that the plan is an overdue measure to prevent more foreclosures: "Tired of waiting on the banks and regulators, community groups and labor unions, including SEIU members, are taking action to find solutions locally."
The opposing stance of two organizations charged with protecting the financial interests of the same group of employees shows some of the complexities that have made it difficult to remedy ongoing problems created by the 2007 housing bust.
The SEIU considers the fears of institutional investors over the possible impact to their holds such as Calpers to be unfounded scare tactics. It is more concerned with helping families struggling with their mortgage payments.
Located east of San Francisco and home to an oil refinery, Richmond is a world away from the towns on the other side of the San Francisco Bay that are populated by the Silicon Valley elite.
Under the plan, Richmond would buy up underwater mortgages for 80 percent of the homes' current appraised value. The plan contemplates writing down the debt and letting homeowners refinance.
Supporters say the plan would help avert foreclosures and make mortgages more affordable in a city plagued by a high percentage of underwater loans -- a situation in which the balance owed on a mortgage exceeds the value of the property itself. Fully half of Richmond's mortgage borrowers are underwater.
"If the program succeeds it will help homeowners get principal reduction, which will help people stay in their homes and some day own their homes," said Doris Ducre, a 60-year-old lab technician. She said her four-bedroom home in Richmond was last appraised at less than $200,000, well below the roughly $400,000 she owes on it.
George Linn, spokesman for the Retired Public Employees' Association of California, a group of retirees and active employees of Calpers, sympathizes with borrowers like Ducre, but he sees the plan as a risk for any investor in mortgage-backed securities. He intends to press that point at the next meeting of Calpers' investment committee.
"This may have far-reaching effects," he said. "It's not just in Richmond that people find themselves under water with their mortgages."
Richmond could use eminent domain, a power typically used to seize property for public purposes such as building roads, to acquire mortgages if the investors holding the mortgages turn down offers to buy homes at deep discount to the value of the loans.
Richmond has already made offers for 624 delinquent and performing mortgages, spurring critics to say it is lending its eminent domain power to Mortgage Resolution Partners, the investor group that pitched the plan to Richmond and could split profits from refinancings with the city.
The financial debate swirling around the plan doesn't matter to Millie Cleveland, an SEIU field representative for Richmond who shares Mayor Gayle McLaughlin's view of the plan. "Now we have the political will to take on the banks," she said.
Banks -- Wells Fargo & Co, Deutsche Bank AG, Bank of New York Mellon -- are contesting Richmond's plan, but as trustees for others with stakes in mortgages in the city. And like Calpers, those bondholders -- which include BlackRock Inc, DoubleLine Capital LP, Pacific Investment Management Co, Fannie Mae and Freddie Mac - are concerned Richmond may prove a precedent.
"The fear is that it'll open a floodgate," said Vince Fiorillo, president of the board the Association of Mortgage Investors and global sales director at DoubleLine Capital.
Richmond's city council voted 4-3 to advance the plan earlier this month, but it would need a fifth vote to actually begin seizing mortgages, and it's not clear when such a vote might take place.
Wells and Deutsche Bank sued in federal court in San Francisco to halt the plan, but the suit was dismissed as premature. Bank of New York Mellon is pressing a separate suit against Richmond.
(Corrects headline, and 1st and 2nd paragraphs to show that Calpers is concerned over the plan, not that it says it is opposed to it)
(Reporting by Jim Christie; Editing by Leslie Adler)
- eminent domain