The city of Richmond, Calif., moved a step closer to implementing a novel plan to restructure mortgages using its powers of eminent domain when a judge Thursday declined for now to grant an injunction sought by several of the nation’s largest mortgage investors.
U.S. District Judge Charles Breyer ruled on Thursday that bondholders’ request to grant an injunction wasn’t yet ripe, meaning the city wasn’t far enough along in its mortgage-seizure initiative for the court to intervene.
Bond investors sued Richmond in federal court in San Francisco last month, arguing that the city’s loan-condemnation plan is unconstitutional and that it doesn’t serve a valid public purpose. Units of Wells Fargo & Co. and Deutsche Bank AG filed the lawsuit on behalf of investors that include BlackRock Inc. and Pacific Investment Management Co., as well as government-controlled mortgage companies Fannie Mae and Freddie Mac.
Judge Breyer declined to rule Thursday on the broader arguments raised in the case. He said he would rule Monday on the city’s motion to dismiss the case. If the case isn’t dismissed, bondholders could renew their request for an injunction once the city appears poised to condemn loans.
At a city council hearing late Tuesday, Richmond leaders rejected a resolution that would have pulled the plug on the eminent-domain effort and agreed to a separate resolution, on a 4-3 vote, to move ahead with the plan. The city would have to vote again to begin seizing loans, which would take place in state court.
If that happens, one possible outcome of the current court challenge is that the banks would instead need to seek an injunction in state court.
“It’s Richmond two and Wall Street zero” because investors’ attempts to “bully and intimidate” the city had failed at city hall and in court, said Amy Schur, a campaign director for a group called the Alliance of Californians for Community Empowerment, which supports the eminent-domain plan.
[...]The city is seeking to forcibly acquire mortgages on homes that have fallen sharply in value, leaving borrowers “underwater.” The plan would work like this: for a home with an existing $300,000 mortgage that now has a market value of $150,000, Richmond might argue the loan is worth only $120,000. If a judge agreed, the city’s financial backers would fund the seizure of the loan, paying the current loan investors that reduced amount.
Then, they could offer to help the homeowner refinance into a new $145,000, 30-year mortgage backed by a government agency. That would leave $25,000 in profit, minus the origination costs, to be divided between the city and Mortgage Resolution Partners, the private firm advancing the eminent-domain plan.
Wall Street is freaking out over this in a big way, because there’s no way they can make money and they lose everything because of their greed. Oh dear! Stay tuned, it’s not over yet…