California city faults bondholder lawsuit over eminent domain

Fri Aug 23, 2013 12:11pm EDT

* Richmond says lawsuit premature, sees no irreparable harm

* Bondholders fear losses if underwater mortgages seized

By Jonathan Stempel

Aug 23 (Reuters) - The city of Richmond, California, which has threatened to invoke eminent domain to help struggling homeowners by seizing troubled mortgages, urged a federal judge to throw out a lawsuit by bond investors to prevent the seizures from taking place.

In court filings late on Thursday, the San Francisco suburb said trustees that represent investors including BlackRock Inc and Allianz SE's Pacific Investment Management Co acted prematurely in seeking a preliminary injunction, and cannot show irreparable harm.

Richmond also noted that its City Council has not yet begun to consider whether there is even a "necessity" to use eminent domain, even as surging foreclosures contribute to deteriorating neighborhoods, higher crime and a shrinking tax base.

Some other cities also considering the use of eminent domain are facing similar problems.

The trustees Wells Fargo & Co and Deutsche Bank AG sued Richmond on Aug. 7, contending that the city's proposed plan would violate the U.S. Constitution by taking private property for public use without just compensation.

"This case is just harassment," and is "intended to intimidate officials and community groups in the city and other localities considering similar proposals for addressing the underwater mortgage crisis," Richmond said in a filing with the U.S. District Court in San Francisco.

So-called underwater mortgages are home loans on which borrowers owe more than their homes are currently worth.

Ropes & Gray, a law firm representing the bond trustees, was not immediately available for comment.

A similar lawsuit against Richmond was filed this month in the same court by Bank of New York Mellon Co.

BILLIONS MAY BE AT STAKE

Richmond has offered to buy more than 620 underwater mortgages for 80 percent of the homes' fair value. Its plan contemplates writing down the debt and letting homeowners refinance.

However, if the city's offers were refused, Richmond could potentially invoke eminent domain to condemn and buy the loans.

Richmond has been working with Mortgage Resolution Partners, a private investment firm that has pitched the idea of eminent domain to municipalities for over a year. The firm would receive a fee for each restructured loan.

William Lindsay, Richmond's city manager, said 51 percent of the city's homeowners owe more on their mortgages than their homes are worth, and that borrowers on average owe 45 percent more than their homes' worth. He said the median sale price has fallen to about $217,000 from $456,000 in January 2006.

Several other U.S. cities have been studying the use of eminent domain to address underwater mortgages, including Seattle; Newark, New Jersey, and North Las Vegas, Nevada.

Wells Fargo and Deutsche Bank have estimated that investors could lose more than $200 million in Richmond alone if the power were invoked on a potential 1,000 to 2,000 home loans.

"If Richmond were allowed to proceed, other local governments would follow suit, with the result that these damages across residential mortgage-backed securities trusts would exceed billions of dollars," they said.

Richmond, however, contended that the trustees would suffer no injury that courts could address even if their challenge to eminent domain were rejected.

"Investors do not have sentimental attachment to mortgage loans such that their loss cannot be compensated in money," it said. "The property owner in an eminent domain lawsuit is entitled by law to receive the full fair market value of the property. It cannot be irreparable harm for a plaintiff to receive everything to which the plaintiff is entitled."

The cases are Wells Fargo Bank NA et al v. City of Richmond California et al, U.S. District Court, Northern District of California, No. 13-03663; and Bank of New York Mellon v. City of Richmond, California in the same court, No. 13-03664.