Attorneys for banking institutions pushed back against Mortgage Resolution Partners and the City of Richmond in court records this week to prevent the launch of a controversial eminent domain plan.

One of the more shocking allegations they put forth in court documents is that many of the targeted 624 loans are not even underwater.

If enacted, the city of Richmond would use its powers of eminent domain to seize underwater mortgages from investors, restructuring the underlying debt for borrowers.

The legal sparring between the two parties and the banking industry escalated this week, with Wells Fargo (WFC) and Deutsche Bank (DB) defending their right to obtain an injunction against the city and MRP to prevent the program from derailing the housing economy.

First, MRP and Richmond tried to get the banks' preliminary injunction request thrown out of court. As part of their pushback plan, Richmond and MRP filed documents with the court, claiming the banks' case is not ripe for litigation since the proposal has yet to take effect. Furthermore, they argued the banks failed to meet all the required elements of a preliminary injunction.

The banks stepped in for round two this week, filing court documents claiming not only is the case ripe, it's necessary to stave off a proposal that would shake the very foundation of the US mortgage finance system. The two banks cited an investments and structured finance expert in their filing.

"The eminent domain seizure of mortgage loans by the City of Richmond will cause a serious and immediate threat to the U.S. mortgage market…," wrote Phillip Burnaman, co-founder and principal of Murry & Burnaman in a court declaration. "The seizure program will cause injury to PLS (private label securitization) trusts and consequently their certificate holders, who include individual savers and investors in pension and retirement plans."

He added, "The injury to citizens of Richmond and the State of California who are employed in the housing and mortgage industry is equally significant and is potentially severe."

Burnaman went on to claim that 31% of the targeted loans have loan-to-value ratios below 100%. In addition, he says, 43% of the loans are underwater, but stil current. And when analyzing that performing group, he estimates 45% of those borrowers will reach a positive equity position within the next two years.

The documents show that the actions of MRP and Richmond are well underway and put homeowners at risk, said lawyers from Ropes & Gray, the firm filing the case on the banks' behalf.

"MRP already has taken substantial steps in implementing its loan seizure scheme in accordance with a pre-determined plan — it has targeted specific loans, made offers to acquire those loans under threat of eminent domain seizure, and is now preparing to effectuate such seizures by initiating state court condemnation proceedings," said John Ertman, a partner at Ropes & Gray.

He continued, "MRP and Richmond have flatly rejected all requests to suspend activity until the court reviews the significant constitutional challenges. The law is well-settled that injunctive relief can be considered before millions of savers suffer irreparable harm."

Richmond is attempting to put eminent domain into action, which poses an automatic threat to investors and the mortgage market because once the program is implemented it cannot be carved back easily, an industry lawyer added.

As a result, opponents are filing suit early to prevent the plan's enactment.

"The servicers are working to keep homeowners in their homes and to find a way to provide affordable housing options to these homeowners," concluded an industry lawyer. "MRP and Richmond can try, but they can’t deny this."

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