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City of Richmond’s Plan to Seize Underwater Mortgages Stays Alive After San Francisco Judge Dismisses Banks’ Lawsuit

house.jpgEminent domain is generally associated with the government taking private property from people. However, the City of Richmond is attempting to take a novel approach to this tool by using the power of eminent domain to keep its own residents in their homes. Earlier this month, the City Council of Richmond voted in favor of its mayor’s plan to allow the use of eminent domain to seize underwater mortgages. In doing so, the City of Richmond became the first city in the United States to take such a step toward helping its residents from avoiding foreclosure.

Recent reports highlight why the city might be considering taking such a drastic step. According to recent reports, in 2012, 914 families in Richmond lost their homes to foreclosure. In addition, not only were 4,649 Richmond residents underwater on their mortgages (49% of all mortgages in the city) by over $700 million combined, but these foreclosures have come at a great cost to the city. In 2012, there was a $1.4 million decline in property tax revenues to the city of Richmond, including $7.9 million cost to the local government.

The city hopes to acquire the mortgages with negative equity so that the families can stay in their homes. Since the City of Richmond does not have money to take on these loans alone, they joined with investment firm Mortgage Resolution Partners (MRP) to sort out a plan to prevent banks from foreclosing on the homes. More specifically, if the city goes forward with the plans, the city would seize the underwater mortgage through eminent domain. Then, investors brought together by MRP would pay off bondholders at close to the current appraised value, and eventually line up a new mortgage lower than the previous amount.

Not surprisingly, lenders are not in favor of this plan, alleging that it is both unconstitutional and will hurt future lending. In fact, bondholders and investors filed an injunction against the city through trustees Wells Fargo & Co. and Deutsche Bank AG in the U.S. District Court in San Francisco, attempting to block the plan. The injunction specifically aims to prevent the City of Richmond from seizing underwater home loans through eminent domain. On September 12, 2013, Judge Charles Breyer of the U.S. District Court in San Francisco ruled that the request for preliminary injunction was premature and should not be heard at this time since city counsel had not yet voted on whether to actually go to state court to seize the loans. Only days later, on September 16, 2013, Judge Breyer dismissed the lawsuit in its entirety, holding the claims were not ripe and that the events that banks and lenders are concerned about may never actually happen.

This battle, however, is far from over. Despite this victory for the city, future implementation of the plan may be further impeded by the Federal Housing Finance Agency, (FHFA) which regulates Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks, which issued a statement stating that plans such as these could hamper the “safe and sound operations” of the entities it regulates. Similarly, the American Bankers Association, the California Mortgage Bankers Association, and the U.S. Chamber of Commerce, each of whom filed briefs in support of the case, will likely not go down without an additional fight.

At the same time, the City of Richmond is not backing down. The city recently voted to form a Joint Powers Authority to attract other communities and cities to pursue similar plans. Already, other cities throughout California, including Vallejo, San Francisco, and El Monte in Los Angeles County are evaluating the concept of using eminent domain to reduce the mortgage principals of underwater mortgage holders.

If you have any questions about the City of Richmond’s plan and how it may affect you, or have any other legal issues relating to the sale, purchase, development or occupancy of your property, contact the Bay Area real estate attorneys at the Law Offices of James G. Schwartz today to arrange a consultation. We represent all parties in both commercial and resident real estate development, transactions and disputes, including owners and buyers, mortgage companies, and real estate brokers.

Sources:

Eminent domain could be used in battle against foreclosures in Richmond, by Robert Rogers, Contra Costa Times

After 7-hour meeting, it’s on: Richmond sticks with its plan to seize mortgages through eminent domain, by Lydia DePillis, The Washington Post

Banks’ eminent domain suit against Richmond tossed, by Carolyn Said, The San Francisco Chronicle