The ratings agency gave the outlook following a U.S. judge’s dismissal of the mortgage industry lawsuit that challenged the California city’s eminent domain plan.
“The eminent domain program is credit negative for the city because it will likely lead banks to raise mortgage interest rates and reduce mortgage availability, which will in turn limit the growth of the property values and related taxes,” associate analyst Julian Metcalf wrote in a report.
Although the court dismissed the lawsuit, which was brought by Wells Fargo and Deutsche Bank on behalf of a group of bondholders, state law requires two-thirds of the city council to approve an eminent domain action before it is implemented.
If approved and implemented, Richmond would be the first U.S. city to use eminent domain as a strategy to help homeowners stay in their homes by making their mortgages more affordable.
Doing so, however, could increase risks and potential costs for mortgage lenders, causing them to factor in the risk by raising interest rates or decreasing mortgage availability.
“More expensive mortgages will reduce housing demand in Richmond and moderate house price gains,” Metcalf said. “Over the last year, home prices have increased by 45% in Richmond and by 44% in Contra Costa County, where Richmond is located.”
While this is a rapid increase, home prices are still well below their pre-recession peaks and many homes’ values remain underwater relative to their mortgage amounts.
Moody’s said that several events could still derail the city’s plan, including a failure to achieve the two-thirds vote and legal uncertainty.