Wow! A lot has happened on this topic since our July 29, 2013 post! The developments over the last six weeks are significant because one city (Richmond, California) may be close to making a decision whether to use eminent domain to acquire underwater mortgages, while another (North Las Vegas, Nevada) has decided it will not use eminent domain to acquire underwater mortgages. Here are the highlights of the developments of the last six weeks:
- At the end of July, as reported by The New York Times, the City of Richmond, California sent letters offering to buy 626 underwater loans. The NBC News website carried a Reuters story that the offers were for “80% of the fair value of the homes” and said the City “expect[ed] responses to its letters no later than Aug[ust] 13.” The Reuters story also reported that Richmond Mayor Gayle McLaughlin said the City Council would be in a position by September to begin its condemnation of underwater mortgages program.
- The San Francisco Chronicle reported on the Richmond offer letters, also, identifying the number of underwater loans as 624, of which 444 were current, with the balance being delinquent.
- On August 7, Wells Fargo Bank, Deutsche Bank National Trust Company, and Deutsche Bank Trust Company Americas, “as trustees for hundreds of residential mortgage-backed securitization . . . trusts” filed a federal lawsuit in the Northern District of California against the City of Richmond and Mortgage Resolution Partners. The lawsuit seeks “declaratory and injunctive relief declaring that the Richmond Seizure Program violates the United States Constitution, the California Constitution, and other state laws, and enjoining [the City and Mortgage Resolution Partners] from implementing the [Richmond Seizure] Program.” The preliminary legal wrangling has been outlined by Hawaii eminent domain lawyer Robert Thomas on his website.
- Also in early August, as reported by NuWire Investor, “the Federal Housing Financial Agency, regulator of Fannie Mae and Freddie Mac, two of the biggest investors in private-label mortgage-backed securities, issued a strong statement against [Richmond’s plan to use eminent domain to acquire underwater mortgages], saying it would legally challenge any local or state action that sanctions use of eminent domain.” The NuWire article went on to say that the FHFA would “also consider using its authority to ‘direct the regulated entities to limit, restrict or cease business activities within the jurisdiction of any state or local authority employing eminent domain to restructure mortgage loan contracts; or take such other actions as may be appropriate to respond to market uncertainty or increased costs created by any movement to put in place such programs.'”
- On August 13, the Los Angeles Times reported that a U.S. Department of Housing and Urban Development letter stated “‘HUD recognizes the serious concerns raised by these legal actions against Richmond, California and the private entities working with the city. Pending legal developments and possible further execution of the plans in question, HUD does not know whether any new mortgage which might be created will qualify for insurance by the Federal Housing Administration.'”
- On August 15, as reported on www.nbcbayarea.com, Richmond Mayor Gayle McLaughlin appeared at Wells Fargo headquarters in San Francisco to demand that Wells Fargo drop its federal lawsuit against Richmond.
- Also on August 15, the Los Angeles Times reported that one Wells Fargo response to a Richmond offer letter stated “‘in its role as either servicer of the loans or as trustee, [Wells Fargo] does not have the contractual authority to sell the loans.”’ According to the article, Wells Fargo’s letter also said “the bank ‘is not aware of any other party having the contractual authority to sell the loans or consider your offer.'”
- As reported August 29, in the San Francisco Chronicle, Wall Street financiers refused to refinance Richmond’s municipal bonds, which “cost the city nearly $4 million in lost savings . . . . Meanwhile, bonds issued by other cities with lower credit ratings found buyers.”
- On September 4, the City of North Las Vegas voted 5-0 to reject the Mortgage Resolution Partners plan to use eminent domain to acquire underwater mortgages if mortgage holders would not sell the mortgages to the City voluntarily, as reported by Reuters and the Las Vegas Review-Journal.
A number of commentators have raised several interesting points about Richmond’s plan to acquire underwater mortgages using condemnation. Bloomberg pointed out that reduction of a borrower’s principal could create tax liability in the homeowner. Other commentators have suggested that, because many of the loans identified by Richmond are performing, the relevant value inquiry is not the value of the security (i.e., the home), but the value of the income stream. See articles by Edward G. Burg, Esq. and Anthony Della Pelle, Esq.
LATE-BREAKING NEWS: Early in the morning on Wednesday, September 11, the Richmond City Council voted 4-3 “to continue exploring the use of eminent domain for underwater mortgages, after a lengthy and contentious meeting….” and plans to create “a Joint Powers Authority with other interested cites as a next step forward….” according to the San Francisco Chronicle.
The next big event could be September 13, 2013 when the Motion for Preliminary Injunction in the Wells Fargo/Deutsche B
ank federal lawsuit is heard.
For more on this topic, see posts of July 29, June 5, February 19, January 29, August 23 2012, as well as the December 10, 2012 post via the American Bar Association. As always, stay tuned to our blog for further updates.