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Mortgage bond trustees representing investors including BlackRock Inc. and Pacific Investment Management Co. sued the city on Aug. 7, alleging the proposal to help homeowners by taking mortgages through eminent domain was unconstitutional and seeking a court order blocking any seizures.
“This case is just harassment,” Richmond said in a response filed yesterday in federal court in San Francisco, arguing that the city council hasn’t adopted a resolution authorizing the mortgage plan so no court order should be granted.
The city sent letters last month asking trustees to sell the loans and saying it may seek to acquire them through eminent domain if they refuse.
In a related filing, the city and Mortgage Resolution Partners said claims by bondholders and their trustees that they will be harmed by Richmond’s plan are conjectural and hypothetical and as such should be dismissed.
“The complaint does not—and could not—claim that the city manager’s offer letter required the banks to take any action or states that the city has decided to exercise eminent domain authority,” the city’s lawyers said in the filing today.
Wells Fargo & Co., trustee of the mortgage bond investors, and Bank of New York Mellon Corp., in a similar lawsuit filed in the same court, claim Richmond’s plan violates constitutional protections against impairing private contracts and the taking of private property for public use without just compensation.
The plan advanced last month with Richmond backing offers to buy 624 loans, making it the first city to push the idea so far forward. Those offers would need to be refused before the city could follow through with its mayor’s vow to invoke its potential powers to force sales of the mostly non-delinquent loans, so that homeowners could get their debt balances cut to less than the current values of their properties.
The program would harm owners of mortgage bonds by paying them too little for loans, as well as damage communities by drying up lending, at least 18 trade groups representing asset managers, bankers, real estate firms and builders have said in past statements. Costs to investors could exceed $200 million just on loans in Richmond, according to the Wells Fargo complaint.
At least a dozen cities still dealing with the fallout of worst slump in home prices since the Great Depression are studying the eminent domain idea. They include El Monte, Calif., North Las Vegas, Nev., and Irvington, N.J.
Holly Rockwood, a spokeswoman for San Francisco-based Wells Fargo, declined to comment yesterday on the city’s filing.
