* Richmond says lawsuit premature, sees no irreparable harm
* Bondholders fear losses if underwater mortgages seized
By Jonathan Stempel
Aug 23 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
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.