BlackRock Inc. (BLK:US), Pacific Investment Management Co., DoubleLine Capital LP and other bondholders are asking a court to block a proposal by Richmond, California, to seize underwater mortgages through eminent domain.
With this week’s vote by Richmond’s city council to press ahead with an effort its mayor claims will help homeowners avoid foreclosure and fend off blight, the dispute between the northern California oil refinery town and Wall Street moved today to the federal courthouse in San Francisco.
U.S. District Judge Charles Breyer is hearing arguments from both sides on whether to order the city to halt efforts to use eminent domain to take over loans. He will also consider the city’s request to find that the bondholders went to court prematurely and dismiss their claims because the city council hasn’t approved the plan.
A ruling favoring bondholders, who sued the city through their bank trustees, would dissuade other cities from following in Richmond’s footsteps, said Dan Schechter, a law professor at Loyola Law School, Los Angeles. A decision for Richmond won’t encourage other municipalities to follow suit because it wouldn’t deal directly with the merits of bondholders’ claims that the Richmond plan is unconstitutional, he said.
“The court will hold that no injunctive relief is available at this time. That doesn’t mean the bondholders are without remedy,” Schechter said by phone. “If no injunction is issued, it would preserve the status quo.”
The city council voted at about 2 a.m. yesterday to move forward with a program to reduce the principal on troubled mortgages. Under the plan proposed by Steven Gluckstern’s Mortgage Resolution Partners LLC, the city would seize the loans and refinance them, providing borrowers with built-in equity, to avert foreclosures.
San Francisco-based Mortgage Resolution Partners would provide services and arrange for private investment funds that would profit by buying the loans for less than property values.
The company is shopping around the plan to several communities; Richmond is the only one to pursue the plan, City Manager Bill Lindsay told the council Sept. 10.
The city’s plan violates constitutional protections for private contracts, interstate commerce and the taking of private property for public use without just compensation, according to complaints filed by Wells Fargo & Co. (WFC:US), Deutsche Bank AG and Bank of New York Mellon Corp. (BK:US) on behalf of investors that hold bonds backed by the Richmond mortgages.
“If Richmond is allowed to proceed, other local governments would likely follow suit, with the result that losses across residential mortgage backed securities trusts and their investors would exceed billions of dollars,” Rocky Tsai, an attorney for the banks, said in a court filing.
The Wells Fargo lawsuit is “harassment,” and an injunction should be rejected because the city council hasn’t voted to use eminent domain, and even if it did, the banks could fight back in the court that will decide matters in the seizure proceeding, Scott Kronland, an attorney for the city, said in court filings.
“The parade of horribles the banks invoke are unfounded,” he said.
The cases are Wells Fargo Bank v. City of Richmond, 13-3663, and Bank of New York Mellon v. City of Richmond, 13-3664, U.S. District Court, Northern District of California (San Francisco).
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