Richmond Says Bondholders' Eminent Domain Suit Too Early

The city of Richmond, California, and Mortgage Resolution Partners LLC told a federal judge that a bondholders’ lawsuit seeking to block it from helping homeowners by seizing mortgages through eminent domain is premature.

Mortgage bond trustees representing investors including BlackRock Inc. (BLK) and Pacific Investment Management Co. sued the city on Aug. 7, alleging the proposal to take mortgages through eminent domain was unconstitutional and seeking a court order blocking any seizures.

“This case is just harassment,” Richmond said in a response filed today in federal court in San Francisco, arguing that the city council hasn’t adopted a resolution authorizing the mortgage plan.

Richmond “is still exploring the possibility of acquiring loans through negotiations,” the city said in today’s filing. “The banks’ claims are not ripe and none of the preliminary injunction factors are met, so the banks’ motion should be denied.”

Wells Fargo & Co. (WFC), trustee of the mortgage bond investors, and Bank of New York Mellon Corp., in a similar lawsuit filed in the same court, claim Richmond’s plan violates constitutional protections against impairing private contracts and the taking of private property for public use without just compensation.

624 Loans

The plan advanced last month with Richmond backing offers to buy 624 loans, making it the first city to push the idea so far forward. Those offers would need to be refused before the city could follow through with its mayor’s vow to invoke its potential powers to force sales of the mostly non-delinquent loans, so that homeowners could get their debt balances cut to less than the current values of their properties.

The program would harm owners of mortgage bonds by paying them too little for loans, as well as damage communities by drying up lending, at least 18 trade groups representing asset managers, bankers, real-estate firms and builders have said in past statements. Costs to investors could exceed $200 million just on loans in Richmond, according to the Wells Fargo complaint.

At least a dozen cities still dealing with the fallout of worst slump in home prices since the Great Depression are studying the eminent domain idea. They include El Monte, California, North Las Vegas, Nevada, and Irvington, New Jersey.

Holly Rockwood, a spokeswoman for San Francisco-based Wells Fargo, declined to immediately comment on the city’s filing.

The cases are Wells Fargo Bank v. City of Richmond, 13-3663, and Bank of New York Mellon v. City of Richmond, 13-3664, U.S. District Court, Northern District of California (San Francisco).

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----With assistance from Jody Shenn in New York and John Gittelsohn in Los Angeles. Editor: Peter Blumberg

To contact the reporters on this story: Karen Gullo in San Francisco at kgullo@bloomberg.net; Joel Rosenblatt in San Francisco at jrosenblatt@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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