Eminent Domain Scrutiny Begins to Heat Up in California Suburb

August 9, 2013

In California, eminent domain has become part and parcel in the city of Richmond, suburb in the San Francisco Bay area. Recently, a group of the nation’s largest bond investors filed suit in attempt to block eminent domain plans executed by city officials. The city of Richmond has partnered with a private investment firm called Mortgage Resolution Partners in its efforts to purchase bonds or proceed with loan sales.
"Mortgage Resolution Partners has led the city of Richmond into an unprecedented use of eminent domain seizure that is unconstitutional, harmful to homeowners and taxpayers, and unfair to millions of individual savers and investors," John Ertman, of Ropes & Gray in New York, told the Wall Street Journal.
Essentially, the plan is to complete the sale of various underwater homes using eminent domain as a smokescreen to give private investors a discount and the city could begin refinancing its citizens’ mortgages into brand-new loans.
“No investor in any trust will be made worse off by the sale of any loan,” said Mortgage Resolution Partners Chairman Steven Gluckstern in a statement. “Rather, it is these trustees that are wasting trust assets at the expense of America’s pensioners by pursuing fruitless litigation.”
A recent Federal Housing Finance Agency (FHFA) release reads: “In response to an eminent domain action to restructure mortgage loans, FHFA may take any of the following steps: 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; 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 take such other actions as may be appropriate to respond to market uncertainty or increased costs created by any movement to put in place such programs.”
The overall result of this seizure via eminent domain would result in an increase of borrowing costs for those in the Richmond area.
“All laws and court cases relating to eminent domain require a payment of ‘just compensation.’ This turns on the valuation of the property and is frequently the crux of legal dispute; such disputes can be expensive, long lasting and produce a "chill" on financial markets,” read an FHFA statement. “In the case of a performing mortgage, the value of the mortgage is a mixture of the unpaid balance and the income stream from that mortgage. Clearly, for an intangible asset, the value of the property is only a part of a calculation; there is a great concern with the value of the contract, particularly a performing contract.”

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