This morning in Richmond, California the city council of the small Bay Area city voted 4-3 to follow through with an unprecedented plan that will rescue local homeowners from a plague of underwater mortgages and effectively push out the big Wall Street banks.

According to city manager Bill Lindsay, about half of Richmond homeowners are in underwater mortgages. Under the new plan called Richmond Community Action to Restore Equity and Stability (CARES), the city will exercise eminent domain — the same power a city might normally use to build an onramp through your backyard — to repurchase over 600 homes at their current market value, rather than the inflated value assigned by the banks. The city tried to buy the homes back at a discount earlier this summer, but not one of the 32 banks or mortgage holders took them up on it. Mother Jones' Josh Harkinson explains how the new plan will work:

Richmond would carry out the purchases with the help of Mortgage Resolution Partners, an advisory firm run by a politically connected group of investors. [More on that here] After Richmond seizes the loans, new lenders arranged by MRP would step in and essentially refinance them. The borrowers would stay in their homes, and the new loans would reflect the current value of the properties. In this scenario, a family in Richmond that bought a $300,000 house that's now worth $200,000 would see its monthly payments decrease by $300 to $800.

Mortgage Resolution Partners, led by Steven Gluckstern (a former Lehman Brothers investment banker himself), has been unsuccessfully trying to convince several other California towns to pull same maneuver over the past few years. According to Richmond's new deal with MRP, however, the city will form an authority that will help other cities team up with MRP as well — meaning the tactic could easily spread.

On the other hand, the banks and the realtors aren't exactly excited about the plan. The local realtors association has been covering the town with mailers claiming Richmond CARES will make town toxic to financiers. Wells Fargo and Deutsche Bank also filed a preemptive lawsuit against the city alleging this use of eminent domain is unconstitutional. A federal court is expected to rule on that case tomorrow.

An earlier version stated the vote was Tuesday night. The city council meeting was Tuesday, but the vote actually happened Wednesday morning.

[KTVU]

[Mother Jones]