Monday Morning Cup of Coffee: Judge deals major blow to investors in GSE lawsuit

Monday Morning Cup of Coffee: Judge deals major blow to investors in GSE lawsuit

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Judge refuses injunction request in eminent domain case

Richmond can move forward with controversial mortgage rescue plan for now

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A federal district judge shut the door on Wells Fargo's (WFC) attempt to prevent the rollout of a controversial eminent domain rescue plan for underwater borrowers in Richmond, Calif.

U.S. District Court Judge Charles Breyer dismissed the bank's push for an injunction without prejudice, claiming the case was not ripe, or legally ready for court, since it rested on future events that have yet to occur.

The dismissal comes six days after the Richmond City Council voted to move forward with eminent domain plans to bail out underwater borrowers in the city. With this vote, Richmond became the first city in the country to approve a process in which the municipality hopes to purchase underwater mortgages from bondholders using the power of eminent domain. Once seized, the loans can be modified to the benefit of borrowers.

The plaintiff, Wells Fargo, filed a motion for preliminary injunction, saying the process should not begin because it could wreak havoc on the nation's mortgage finance system. In response to the injunction, the City of Richmond filed a motion to dismiss the bank's claims.

While the injunction was not granted, the suit can be revisited any time, legal experts say.

Instead of keeping the case on the docket, the judge dismissed it without prejudice, which means it can be refiled when it's clear Richmond has moved forward with an eminent domain action that could harm financial institutions.

The week the voting occurred, prominent national fair housing groups filed an amicus brief, supporting Richmond CARES, the program created to save underwater borrowers by purchasing mortgages held by Wall Street banks in Richmond. In that brief, the groups pushed back against the industry's assertion that eminent domain would stall lending in the area. The housing groups said a decision not to lend in Richmond would lead to claims of lending discrimination.

Amy Schur, campaign director for the Alliance of Californians for Community Empowerment, said the Wall Street lobby had tried hard to scare cities from moving forward over the last few months, but to no avail.

"With today’s victory in court, we expect to now see other cities join with Richmond to advance this important foreclosure prevention program. Today is a victory for struggling homeowners over Wall Street,” said Schur on Monday.

But the financial services industry has no plans to back away from challenging eminent domain in Richmond and other municipalities.

John Ertman, a partner at law firm Ropes & Gray, said Monday’s ruling addresses only the matter of timing before the courts. He expects the issue to eventually be addressed in a court of law.

"This is an unprecedented application of eminent domain powers that we believe is facially unconstitutional," said Ertman. "If implemented by the city, this eminent domain program will cause economic harm to millions of savers and retirees throughout the United States. We stand ready to act at the appropriate time to prevent this unconstitutional investment scheme from unfolding in Richmond or elsewhere."

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