Alert September 17, 2013

California Municipality Approves Mortgage Seizure Plan

The City Council of Richmond, California recently approved a plan that would allow the city to seize mortgages in which the remaining mortgage balance exceeds the property value by using eminent domain, making it the first city to do so. The plan would allow the city to buy the loans from residential mortgage-backed securities trusts at a discounted price by exercising eminent domain powers and then refinance them with federally-insured loans in partnership with a private company. The plan also allows other cities to join Richmond through a joint partnership, in what it describes as an effort to refinance these loans to avoid foreclosures. The use of eminent domain to seize mortgages has faced opposition from the banking, real estate, securities industries and the federal government. In particular, two banking institutions jointly filed a complaint in the United States District Court for the Northern District of California against the city and its investment partner. The banks argue that the city’s plan is unconstitutional, seeks to enrich the city at the expense of the trustees and their beneficiaries in part by targeting performing loans, and could have negative effects on the residential mortgage-backed securities market. The banks also seek to permanently enjoin the city from implementing its plan and a declaratory judgment that the plan is unlawful. FHFA also issued a statement and memorandum in August 2013 to express its "serious concerns on the use of eminent domain to restructure existing financial contracts" and determined that such use of eminent domain "presents a clear threat to the safe and sound operations" of the GSEs.