The City Council of Richmond, Calif., rejected a challenge to the city's proposal to seize and write down troubled mortgages, instead voting 4 to 3 to invite other local governments to join its radical approach to slowing a wave of foreclosures.
Gathering in a large auditorium Tuesday evening to accommodate scores of speakers, the council met for more than seven hours before deciding early Wednesday to back Mayor Gayle McLaughlin's motion to form a joint-powers authority.
A joint-powers authority set up by San Bernardino County, Ontario and Fontana considered a similar plan to seize underwater home loans earlier this year before backing off in the face of powerful Wall Street opposition.
Richmond, a largely working-class and minority city northeast of Berkeley, has offered to buy 624 home loans at a discount from investors in mortgage bonds, saying the loans are under water and is offering their fair market value.
It has said it may use its eminent-domain powers to seize loans if it can't buy them, an action that would require a separate vote with five of the seven council members in favor. The idea would be to then reduce the principal on the loans and refinance the homeowners, restoring their equity and reducing their payments.
In response, the mortgage industry has threatened to cut off lending to the city, saying seizures of troubled loans would disrupt the entire U.S. system of housing finance. Richmond also is battling a federal lawsuit seeking to shut down the program as unconstitutional -- part of a barrage of current and threatened litigation contesting the plan.
Two council members who voted no Wednesday, Nathaniel Bates and Vice Mayor Courtland "Corky" Boozé, had proposed killing the program.
They noted that Richmond already has experienced trouble finding buyers for its municipal bonds as a result of the controversy, and said the city would be at risk of bankruptcy should the lawsuits result in a major damage award against Richmond.
A third no vote came from council member Jim Rogers, who said he would support the plan only if the private investment firm promoting the eminent domain program, Mortgage Resolution Partners, indemnifies the city against any possible loss.
"We all agree that Wall Street has not served this community well. Wall Street brought this country and the world economy to the brink of collapse," Rogers said. But he added: "My job is not to vote whether these people are a bunch of jerks and stick it to them."
McLaughlin's motion directs the city to work with Mortgage Resolution Partners to resolve the indemnification question and other legal issues. The firm has shouldered the city's legal costs so far, but it's unclear what the consequences would be if it were socked with a large damage award and forced to declare bankruptcy.
Several speakers emotionally urged the city to press ahead despite the risks, drawing thanks from the mayor, a member of the Green Party who blamed predatory loans backed by Wall Street for the foreclosure crisis in Richmond.
"The banks have been unwilling or unable to address this situation," she said, "so the city is stepping in to provide a fix."