Wells Fargo (WFC) gained substantial backing from the business and securitization communities in its fight against the Richmond, Calif., eminent domain plan this week.
The Securities Industry and Financial Markets Association (SIFMA) along with the Chamber of Commerce filed a 'friend of the court brief' in a case in which Wells Fargo is trying to get a judge to block the implementation of an eminent domain plan in Richmond. The proposed plan would allow the city to seize underwater mortgages, refinancing the underlying loans for borrowers.
The advocacy group claims in its brief that eminent domain in this context does not benefit the public and will only cause ‘substantial harm’ to the financial system and housing markets.
Additionally, seizing these loans from residential mortgage-backed securities will cause widespread harm, negatively impacting all of the homeowners it intends to help, the organizations claim.
As a result, SIFMA and the Chamber of Commerce filed an amicus brief in Wells Fargo's case against the City of Richmond.
"[We] recognize the significant challenges municipalities face in grappling with the fallout of the housing market and economic downturn, but this extraordinary abuse of municipal power is not the answer, or lawful," the brief said.
While the City of Richmond is not the first to consider the use of eminent domain, it is the first to move forward with the plan and if such a plan proceeds, many market participants are fearful more will inevitably follow.
SIFMA argues that the plan cannot satisfy the ‘public use’ requirement of the Taking Clause of the U.S. Constitution since the plan is not tailored to prevent foreclosures or remedy blight.
SIFMA also argues that the case is ripe for review since it's necessary to stave off a proposal that will disrupt the functionality of the mortgage finance system.
"Not only is the plan likely to cause irreparable harm if it proceeds, but it is causing clear and discernible harm right now," the brief alleged.
Overall, SIFMA and other organizations are concerned that the plans put forth have serious legal defects and will be challenged in court repeatedly.
"We also believe that the execution of these plans to use eminent domain will result in a serious contraction of credit availability, as lenders and secondary market sources of funding react with defensive, very stringent underwriting criteria," concluded SIFMA managing director Timothy Cameron.
Click here to read the full brief.