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Investments

DLA Piper: Richmond eminent domain battle just beginning

Seizing mortgages may do little to help borrowers

Boxing fight legal
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The decision by the city of Richmond, Calif., to seize mortgages via eminent domain could harm not only retirement funds and future mortgage lending, but also the very homeowners that the plan sets out to aid in the first place. And the battle is just beginning.

Mega law firm DLA Piper, noted today in its Real Estate Litigation Alert, that the Richmond strategy hinges on aggregate write-downs to benefit the community at large.

Richmond issued offers-to-purchase letters to 32 holders of RMBS involving over 600 individual mortgages.

"Recipients of the letters have a short time to respond, and, if the offers are rejected, the City will proceed with condemnation of the affected mortgages," writes the authors of the alert, Charles Deem, Paul Hall and Isabelle Ord. "Investors should take care to ensure that the trustees of the RMBS trusts in which they have invested are taking appropriate steps to challenge the City’s efforts," the analysts added.

And for the most part, they are.

The Bank of New York Mellon (BK), for example, is arguing that the Richmond plan constitutes tortious interference with a contract. BNY Mellon and other lenders, servicers and Trustees filed suit in federal court to block the city's plan.

The bank argues that the city is interfering because the loans are currently performing. Considering the loans are not distressed, the financial institutions argue, the communal benefit is diminished.

"The city has primarily targeted performing loans because those are the loans most attractive to new investors," the DLA Piper note states. "However, some observers have noted that such borrowers are the very people who are most likely to pay off their loans per contract and are least likely to need mortgage relief."

Stephen Mihm, an associate professor of history at the University of Georgia, doesn't buy into the mortgage industry argument in an op-ed published in Bloomberg's The Ticker. In the piece, Mihm argues that investors aren't pleased to see investments being manhandled by local municipalities. And to claim Richmond's efforts to seize mortgages via eminent domain are unlawful is ridiculous, judging by the blog post.

"Yet to listen to the hysterical denunciations of the Richmond plan, a proposal to bring 624 mortgages in line with market prices is the epitome of eminent domain abuse," he writes. "History suggests otherwise."

In addition to the denunciations, there is some real mortgage impact to mix with the implications.

On August 8, the Federal Housing Finance Agency, said it may direct Fannie Mae and Freddie Mac to stop secondary mortgage activity in towns that use eminent domain to seize mortgages.

This includes Newark, Seattle, El Monte, California and North Las Vegas, Nevada — cities currently considering similar plans, according to DLA Piper.

"We also believe these programs could further weigh on private investor confidence and appetite for private-label mortgage-backed securities going forward," said Fitch Ratings in a note to clients Friday.

In addition to investors, which include insurance companies and pension funds, title insurance companies indicate an unwillingness to insure new business in communities using eminent domain to seize mortgages.

And according to DLA Piper the Richmond saga is just beginning.

"Because this is the first time a municipality has ever commenced such a legal process and initial lawsuits have now been filed in federal court in San Francisco, the national battle over the constitutionality of seizure programs will take place in the Northern District of California," the litigation alert states.   

"Absent a state or federal legislative solution that says the city’s program is outside the bounds of eminent domain, the legality of the city’s seizure program will be determined in federal court," the report concludes.

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