Investors Sue To Preempt Locality’s Planned Seizure Of Mortgages Using Eminent Domain; FHFA Outlines Potential Responses

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On August 7, trustees representing the interests of investors in mortgage backed securities filed two separate suits to halt the planned use of eminent domain by the city of Richmond, California to seize a group of mortgages. Wells Fargo Bank, N.A. v. City of Richmond, No. 13-3663 (N.D. Cal., complaint filed Aug. 7, 2013); Bank of NY Mellon v. City of Richmond, No. 13-3664 (N.D. Cal., complaint filed Aug. 7, 2013). The city recently threatened to seize 626 mortgages if the owners and servicers of those debts do not agree to sell the mortgages to the city. The complaints allege that the city is seeking to use its eminent domain power impermissibly to generate profits for private investors. The trustees explain that the city’s plan primarily involves performing loans and would value those loans at steeply discounted prices rather than the loan balance, under the guise of seizing “underwater” mortgages to prevent future defaults and foreclosures. The complaints assert that the vast majority of the loans are not at imminent risk of default and are located outside of the city, and, as such, the seizure plan will violate the U.S. Constitution’s Takings Clause, Commerce Clause, and Contract Clause, as well as the state’s statutory prohibitions against extraterritorial seizures. The trustees seek a declaration that the eminent domain plan violates the U.S. Constitution, the California Constitution, and other state laws, and an order enjoining the city from implementing the program.

On the same day, the FHFA released a memorandum prepared by its general counsel regarding eminent domain, based in part on public input solicited last year. In a separate statement, the FHFA states that it could: (i) initiate legal challenges to any local or state action that sanctions the use of eminent domain to restructure mortgage loan contracts that affect FHFA’s regulated entities; (ii) act by order or by regulation to direct the regulated entities to limit, restrict or cease business activities within the jurisdiction of any state or local authority employing eminent domain to restructure mortgage loan contracts; or (iii) take such other appropriate actions to respond to market uncertainty or increased costs created by any movement to put in place such programs.