Bondholders’ Suit Over Eminent Domain Is Dismissed

Posted by Patrick Barnard on September 17, 2013 No Comments
Categories : Required Reading

14343_gavel Bondholders' Suit Over Eminent Domain Is Dismissed A U.S. District Court judge has dismissed a lawsuit brought by a group of bondholders against Richmond, Calif., regarding the city's controversial plan to help underwater homeowners by seizing mortgages via eminent domain.

According to a Bloomberg News report, U.S. District Judge Charles Breyer in San Francisco ruled that the bondholders, led by BlackRock Inc., filed their lawsuit prematurely, as the City of Richmond had not yet officially adopted the proposal as of when the suit was filed. The city council approved the measure last week; however, Breyer decided to dismiss the case instead of putting it on hold.

‘Ripeness of these claims does not rest on contingent future events certain to occur, but rather on future events that may never occur,’ Breyer wrote in his decision.

The bondholders, also including Pacific Investment Management Co. and DoubleLine Capital LP, were seeking an injunction in order to block Richmond from continuing to pursue the plan. Richmond is planning to seize more than 600 mortgages on which the amount owed is greater than the value of the property and refinance them so that the property owner is no longer underwater. In the event that bondholders refuse to repurchase the loans, the city would exercise its right to invoke eminent domain to seize the mortgages.

Investors are vehemently opposed to such measures, as they feel they will be financially harmed through the refinancing.

Mortgage Resolution Partners (MRP), the firm that will provide financing to Richmond to seize the mortgages, is reportedly now working with city officials in Richmond to iron out the details of the plan.

The Richmond city council narrowly approved the plan last Wednesday by a 4-3 vote. Chicago; Stockton, Calif.; and Brockton, Mass., are among the other cities that have considered such proposals, but Richmond is the first to approve one.

The concept involves a local government purchasing underwater mortgages secured by properties within its borders, restructuring them to reflect actual property values and then reselling them on the secondary market. In the event servicers and investors are unwilling to participate, then the municipality would seize the loans (with compensation to the owners) using eminent domain.

MRP has brought similar plans before other local governments – most recently in North Las Vegas, Nev., and earlier this year in San Bernardino County in Southern California – however, most of those municipalities, including North Las Vegas, have since decided not to move forward with the proposals.

In August, the Federal Housing Finance Agency (FHFA) issued a statement vowing to fight local, county and state eminent domain proceedings in court and threatening to cut off involved municipalities from access to Fannie and Freddie loans should they choose to pursue the eminent domain option. The FHFA is concerned that widespread seizures of the loans and their subsequent refinancing would diminish asset values.

In a recent memorandum, the FHFA says it ‘continues to have serious concerns on the use of eminent domain to restructure existing financial contracts and has determined such use presents a clear threat to the safe-and-sound operations of Fannie Mae, Freddie Mac and the Federal Home Loan Banks.’

In addition, the Department of Housing and Urban Development has expressed opposition to the plan.

Meanwhile, Rep. John Campbell, R-Calif., recently reintroduced the Defending American Taxpayers From Abusive Government Takings Act, which was originally introduced in September 2012. The bill would, in effect, preclude cities and towns from using eminent domain as a tool for keeping homeowners out of foreclosure.

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