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The Main Street bailout that came too late

July 31, 2013: 10:41 AM ET

Richmond, California is saving local underwater mortgage holders from the banks. Where was this solution four years ago?

Richmond wants to avoid these signs.

Richmond wants to avoid these signs.

FORTUNE – In the wake of the financial crisis in 2008, it seemed like everyone from Wall Street to America's auto industry got a bailout; the government swooped in to rescue companies from Bank of America (BAC) to General Motors (GM) and American International Group (AIG).

And as home prices collapsed, Uncle Sam tried to help borrowers burdened by homes worth less than their mortgages. Their efforts never really worked, however. Millions have lost their homes to foreclosure in what has become one of the worst housing crises in recent history.

Oddly enough, a slice of Main Street is finally getting the bailout it has long deserved -- only it comes just as America's housing market turns around.

On Tuesday, the working-class city of Richmond, Calif., became the first in the nation to adopt a novel plan to take over underwater mortgages by way of eminent domain -- powers that governments typically use to forcibly seize land and turn around blighted areas for the public good. Only in Richmond, officials would take an unusual route, seizing loans from the banks and servicers that own them; the city would buy home mortgages from financial institutions, write down those loans and refinance homeowners into new loans. If banks resist, the city would seize the loans through eminent domain.

MORE: Why the housing market could grow even if the economy slows

Richmond has sent notices to holders of more than 620 underwater mortgages, asking them to sell these loans to the city so that borrowers can keep their homes and avoid foreclosure. While the rest of the country's housing market is recovering, Richmond has lagged behind. Roughly half of all homeowners with mortgages are underwater, officials say.

Newark, Seattle, and several other cities and states could follow, the New York Times notes. If that actually happens, this would be the bailout Main Street has frustratingly waited years for. Opponents have zeroed in on the costs and legal risks of Richmond's plan, but the real tragedy here is that help of this scale has come too little too late for this city of about 103,000 and the rest of America.

Since the housing boom went bust, approximately 4.5 million homes nationwide have been lost to foreclosure, according to CoreLogic, which tracks data on residential properties. It's hard not to wonder if the powers of eminent domain would have reduced that figure by half, if not more. Not to say there isn't room for a plan like Richmond's now, but it also comes as most Americans have put the worst of the housing crisis behind them.

In June, 55,000 homes fell to foreclosure. That's a lot of homes, but it's also 20% less than a year ago. To be sure, some states could benefit from a plan like Richmond's. Florida, California, Michigan, Texas, and Georgia account for almost half of all homes lost to foreclosure, but the rates of foreclosures in these states have fallen over the past year, according to CoreLogic. Needless to say, the housing market still has its problems: Of all homes with mortgages, 9.7 million homes or 19.8% are underwater as of the first three months this year, with Nevada, Florida, Michigan, Arizona, and Georgia leading. That's down from 10.5 million from the previous quarter, but still more than normal.

There's clearly a place for the powers of eminent domain, but if the housing trends continue, it won't become known as Main Street's mortgage bailout.

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About This Author
Nin-Hai Tseng
Nin-Hai Tseng
Writer, Fortune

Nin-Hai Tseng covers economics and finance. Before joining Fortune, Tseng was a reporter at The Orlando Sentinel and a public affairs associate at GE. She holds an MPA from Columbia University and a BS in Journalism from the University of Florida. She lives in New York City.

Email | @ninhaitseng | RSS

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