Wells Fargo and Deutsche Bank have filed a lawsuit against the city of Richmond and San Francisco investment firm Mortgages Resolution Partners for their plan to use eminent domain to force the sale of 624 underwater mortgages, declaring the plan unconstitutional.
International law firm Ropes and Gray, LLP filed the suit in federal court in San Francisco Wednesday on behalf of the two banks, which represent the bond investors holding the mortgages, in an effort to block the city’s proposal.
Wells Fargo and Deutsche Bank’s lawsuit is filed on behalf of a group of investors that includes government-backed mortgage agencies Fannie Mae and Freddie Mac.
Mayor Gayle McLaughlin announced last month that Richmond was teaming with Mortgage Resolution Partners in a plan to buy more than 600 city residents’ mortgages in order to restructure or modify the loans, giving the financially struggling homeowners more affordable monthly payments.
The plan is meant to prevent foreclosures in a city where roughly half of homeowners are underwater on their mortgages, or owe far more than their home’s current value, according to MRP and city officials.
MRP is providing the investment capital to buy the mortgages in exchange for a flat fee of $4,500 per mortgage, according to the investment firm’s executive chairman Steven Gluckstern.
As part of the deal, the firm also agreed to take on any litigation against the plan.
Late last month, the city sent letters to 32 lenders holding 624 mortgages that are underwater offering to buy the loans.
City officials said that if the lenders don’t accept their offer, Richmond would use its powers of eminent domain to force a sale and seize the mortgages.
Eminent domain is a municipal power usually reserved for purchasing land for public use, such as sidewalks or parks.
The banks’ lawsuit alleges that the city’s use of eminent domain to seize mortgages would not only be unconstitutional but would also cause “immediate and irreparable harm” to the bondholders involved.
In the suit, the banks also allege that the city’s eminent domain plan would harm Richmond in the long-term, making it tougher for residents to get approved for mortgage financing in the future.
Responding to similar criticisms late last month, McLaughlin said threats by banks or mortgage lenders to raise costs for Richmond mortgage borrowers would be “redlining”—a term that describes a discriminatory practice by banks that raise costs or refuse to do business in minority communities.
The mayor could not immediately be reached for comment on the lawsuit today.
This afternoon, a couple-dozen local residents, many who are underwater on their mortgages, marched to Wells Fargo, Chase and Bank of America branches in Richmond to deliver letters calling on the banks to accept the city’s offer.
David Sharples, an organizer with the Alliance of Californians for Community Empowerment, or ACCE, said bank managers today agreed to fax the letters to their CEOs.
Sharples said ACCE members, including struggling local homeowners, believe the banks that are now suing Richmond should instead accept the city’s offer and help repair the damage caused by the financial industry.
“We think big banks like Wells Fargo caused the housing crisis by pushing bad, predatory sub-prime loans onto unsuspecting homeowners, and those homeowners have been waiting for over 5 years for relief, but mortgage lenders like Wells Fargo too often refuse to restructure the loans,” Sharples said. “Now that local officials are stepping in and coming to homeowners’ aid, these same banks are pulling out all the stops to prevent a sensible local solution.”
Laura Dixon, Bay City News