Mortgage Banking Industry Fights Use of Eminent Domain To Seize Underwater Mortgage Loans

by Ballard Spahr LLP

In the aftermath of the foreclosure crisis, a number of local governments are weighing whether to use the power of eminent domain to assist homeowners struggling with underwater mortgages held by lenders who have issued mortgage-backed securities. The prospect of such government intervention has raised considerable concern in several corners, however, including within the mortgage banking industry.

For local government, the idea involves acquiring residential mortgages at less than market value. The local government then refinances the loan at an amount slightly more than it paid, theoretically resulting in a lower principal amount and possibly some equity for the homeowner. A consultant or private entity assists the local government throughout the process and is entitled to fees.

Two municipalities that have considered governmental seizure of private mortgages are the City of Richmond, California, and the City of North Las Vegas, Nevada. While Richmond has embraced the idea in the face of significant opposition, North Las Vegas has decided not to travel this path.

Earlier this month, the Richmond City Council approved a resolution to establish a Joint Powers Authority with other interested municipalities to develop an eminent domain program related to mortgages. The mayor of the City of El Monte has expressed support for the proposal. A resolution also has been introduced urging the City and County of San Francisco Board of Supervisors to offer their support and to explore whether the use of a similar program would make sense in their respective jurisdictions. Seattle and Newark, New Jersey, also may be considering similar plans.

Opponents of Richmond's plan, and opponents of this type of eminent domain use in general, have argued that it will simply invite litigation. At least one lawsuit was filed in federal court by certain bondholders against Richmond, but it was recently dismissed for lack of ripeness because the City's plan is not in a final form. In addition, Mortgage Bankers Association President and CEO David H. Stevens has called the program "a short-term solution for a few underwater borrowers that will have severe negative long-term costs for every homeowner in the city."

Like the City of Richmond, the City of North Las Vegas initially approved an agreement to develop a plan to seize certain mortgage loans. At the City Council meeting, Ballard Spahr spoke against the plan on behalf of members of the mortgage banking industry. Ultimately, North Las Vegas approved entering into an agreement with a private entity that would assist in implementing a plan to seize certain privately held mortgages.

A change in the political landscape, however, led the City of North Las Vegas to terminate the plan. This occurred after a new mayor and a new city council member were later seated and replaced two supporters of the plan. Additionally, the city manager and the city attorney, who also supported the plan, resigned.

While the recent federal complaint against the City of Richmond's plan was dismissed, it is likely that as its plan approaches a final form, more lawsuits will ensue. Depending on how far such eminent domain plans have progressed in other cities, though, early involvement at the local government level may prove to be more fruitful for the lending industry than litigation. Ballard's Spahr's Mortgage Banking Group is assisting members of the industry in their fight against the use of eminent domain to seize and restructure underwater mortgages.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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