Rescue Plan for Homeowners Alarms Banks

     SAN FRANCISCO (CN) – Three banks sued Richmond, Calif., challenging a city plan to use eminent domain to seize houses with underwater mortgages and refinance them at deep discounts for the owners, who would keep them rather than lose them to foreclosure.
     Wells Fargo Bank and Deutsche Bank sued Richmond in one federal lawsuit, and The Bank of New York Mellon sued the city in a separate, similar complaint.
     The banks claim the city’s homeowner-rescue plan will cost the banks and their investors tens of millions of dollars.
     Wells Fargo Bank and Deutsche Bank, in their capacities as trustees for hundreds of mortgage securities trusts, sued Richmond and Mortgage Resolutions Partners (MRP) to try to stop the City Council from implementing its “elaborate profit-driven scheme.”
     The Bank of New York Mellon, also as a trustee, sued Richmond, MRP, and Gordian Sword, a Delaware LLC.
     “Following a scheme devised by a mortgage investment firm that stands to profit handsomely from the deal, the City of Richmond has made clear that it imminently plans to seize residential mortgages – mortgages that are current on their payments – at deep discounts and then refinance the properties at reduced loan values,” Bank of New York Mellon says in its complaint. “The borrowers would retain their homes with a lower debt load. The city and the investment firm each would receive certain fees generated by the refinancing transactions, and then the firm and its investors would profit from reselling federally guaranteed loans.
     “And the trusts and their investors, including pension funds and other institutional investors, who held current, performing loans that had financed the purchase of the homes in the City would be left holding the bag, losing tens of millions of dollars in loan principal.”
     Only mortgages held by trusts sponsored by private entities are targeted, according to Wells Fargo’s complaint. The scheme “avoids seizing loans held by trusts sponsored and guaranteed by Freddie Mac or Fannie Mae, in order to avoid provoking the ire of the federal government. It similarly avoids seizing loans held directly by banks,” Wells Fargo says in its lawsuit.
     Richmond has sent letters to the holders of 624 home mortgages that are underwater, asking them to sell the loans to the city. Richmond plans to buy the loans for 80 percent of the value of the home or less, according to the lawsuits.
     “MRP then plans to refinance those loans with new federally insured loans in amounts substantially above the amounts paid by Richmond to seize the original loan. According to MRP’s published statements, this profit strategy would generate profits of up to 20 percent for MRP and its investors,” Wells Fargo says in its complaint.
     The city and MRP say the process would help struggling homeowners who owe more than their houses are worth, thereby preventing defaults and foreclosures around Richmond. This, in turn, would prevent blight and economic depression.
     “But that characterization is a mere façade, as the Program principally targets performing loans – i.e., the loans of homeowners who have been making their monthly payments for years despite being ‘underwater,’ and who have good credit ratings, as opposed to those loans that are in default or at serious risk of default. The Program targets performing loans because they are not at serious risk of default and therefore can be easily re-financed with a new Federal Housing Authority insured loan for an amount significantly greater than the price paid by Richmond to seize the original loan,” Wells Fargo says in its complaint.
     Of the 624 loans the city has offered to purchase, 85 percent are not in foreclosure and 81 percent have never had a notice of default filed against them or are current, Bank of New York says in its complaint.
     The fact that the targeted loans are not at risk of default “shows that the Seizure Program is designed to create profits for MRP and its investors,” Bank of New York says in its complaint.
     If the holders of the loans do not accept the purchase offers by the deadline of Aug. 13, “the City will attempt to quickly seize possession of the loans. The City Council must first hold a condemnation hearing, and immediately thereafter could file an eminent domain lawsuit in California and use an expedited procedure known as a ‘quick take’ to quickly obtain a court order giving the City possession of the loan. MRP has indicated that the ‘quick take’ procedure is a critical component of the Seizure Program. Once the City receives possession of the loans, it could then extinguish, restructure, and refinance them, causing immediate and irreparable harm to the Trusts that will be exceedingly difficult, if not impossible, to unwind.
     “Thus, there is a high likelihood that defendants will very soon exercise the City’s eminent domain powers to seize possession of mortgage loans under the Seizure Program,” Bank of New York says in its complaint.
     The first 624 loans targeted by Richmond and MRP alone could cost the trusts more than $90 million, the banks claim.
     The plan would harm not only the trusts, but could affect the entire U.S. mortgage industry and housing market, Wells Fargo claims.
     “If Richmond were allowed to proceed, other local governments would follow suit, with the result that these damages across RMBS [residential mortgage-backed securitization] trusts would exceed billions of dollars. Upon information and belief, several other local governments – including, among others, the municipalities of North Las Vegas, Nevada; El Monte, California; La Puente, California; San Joaquin, California; Orange Cove, California; Newark, New Jersey; and Seattle, Washington – are seriously considering the Program or have already engaged MRP or otherwise taken steps toward implementing the Program. This wealth transfer from the RMBS Trusts and their beneficiaries to MRP, local governments, and select homeowners, would seriously adversely impact the national housing market,” Wells Fargo says.
     It adds: “Richmond would advance its local concerns at the expense of an entire sector of interstate commerce that is critical to the health of the national economy. The Program would severely disrupt the interstate market for mortgage-backed securities, which, in turn, is an essential part of the home loan industry that enables a large percentage of Americans to realize the dream of owning their own homes.”
     The banks claim the scheme violates state and federal laws and the Constitution, including the Takings Clause, the Commerce Clause and the Contracts Clause.
     They want Richmond and MRP enjoined from implementing the plan, and declaratory judgment that the seizures are is unconstitutional.
     Wells Fargo and Deutsche Bank are represented by Rocky C. Tsai with Ropes & Gray in San Francisco.
     The Bank of New York Mellon is represented by Bronwyn F. Pollock with Mayer Brown in Palo Alto.
     MRP was not available for comment by press time.

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