Banks sue Richmond to halt plan to seize mortgages
By Robert Rogers Contra Costa Times
Posted: 08/08/2013 12:06:27 PM PDT
Updated: 08/08/2013 06:06:21 PM PDT
RICHMOND -- Major banks on Wednesday sued Richmond and its investment firm partners in an effort to thwart their plan to use the government's power of eminent domain to seize mortgages and slash payments for underwater homeowners.
The suit, filed on behalf of Wells Fargo and Deutsche Bank, seeks a preliminary injunction against Richmond and Mortgage Resolution Partners (MRP), the San Francisco-based investment firm that the city has partnered with to implement the unprecedented plan.
Richmond last week became the first city in the country to partner with MRP on a plan to compel banks to surrender mortgages where the loan amount exceeds the value of the home, allowing the firm to refinance the loans under
Richmond Mayor Gayle McLaughlin speaks to about 100 residents Saturday June 15, 2013 at the Nevin Center about the city's plan to use eminent domain to seize underwater mortgages and reduce costs for homeowners in Richmond, Calif.. (Robert rogers/Bay Area News Group)
terms the homeowners can afford.
"Mortgage Resolution Partners is threatening to seriously harm average Americans, including public pension members, other retirees and individual savers through a brazen scheme to abuse government powers for its own profit," said John Ertman, a partner at Ropes & Gray LLP, the attorneys suing the city on behalf of investors. "This unconstitutional application of eminent domain will be devastating for mortgage finance both public and private. It will completely undermine the willingness for private capital to return to the mortgage markets."
The city's program could cost investors$200 million or more, the lawsuit alleges.
MRP Chairman Steven Gluckstern said the lawsuit is "without merit."
"No investor in any trust will be made worse off by the sale of any loan," Gluckstern said. "Rather, it is these trustees that are wasting trust assets at the expense of America's pensioners by pursuing fruitless litigation."
Richmond Councilman Tom Butt noted that MRP agreed to handle all legal challenges and costs associated with the novel approach. The agreement has been approved by the city council in a 6-1 vote.
"This lawsuit wasn't unexpected," Butt said. "There are legal hurdles to clear before this can go forward anywhere."
City leaders on July 30 announced they have sent letters threatening to use eminent domain to seize 624 underwater mortgages if lenders don't agree to sell them the loans by Aug. 14. The city and MRP offer to buy the loans at current market value, minus about 20 percent for risk of default, costs of the averted foreclosure and to generate the profits for MRP, which is financing the purchases.
Last week, City Manager Bill Lindsay, who signed the letter, said he hoped that lenders may not contest the move in court. Those hopes were short-lived.
The 49-page lawsuit calls the plan unconstitutional on myriad points, including violating the just compensation requirements of the Takings Clause of the U.S. Constitution and California Constitution.
"The program is a for-profit scheme that proposes seizing performing mortgage loans at fractions of their unpaid principal balance, prices that are below the fair market value for even loans that are in default," the lawsuit reads.
Mortgage holders were directed to sue by Wall Street firms on behalf of their clients and other institutions, Ertman said. More than 100 loan trusts and banks were listed on the suit as plaintiffs.
City leaders, led by Mayor Gayle McLaughlin, say 47 percent of mortgages remain underwater in the city, and that banks used predatory lending to dupe homeowners, then refused to reduce principals despite reaping huge government bailouts, which has deepened the housing crisis and blighted the community with foreclosures.
McLaughlin has said wiping out millions in housing debt, reducing monthly payments and keeping residents in their homes will stimulate the local economy.
Contact Robert Rogers at 510-262-2726 or firstname.lastname@example.org. Follow him at Twitter.com/roberthrogers.