The Structured Finance Industry Group, Inc. (SFIG) announced that it has filed an amicus curiae brief in support of Wells Fargo National Association's motion for a preliminary injunction against the City of Richmond, California and Mortgage Resolution Partners LLC (MRP). The case, which attempts to halt the city's proposed use of eminent domain to seize mortgage loans from private label securitization trusts (PLS Trusts), is currently proceeding in the United States District Court, Northern District of California, San Francisco Division.
"While SFIG recognizes the challenges currently confronting municipalities and borrowers, the use of eminent domain to seize mortgage loans is an illegitimate tactic that undermines the integrity of the entire home mortgage system," said Richard Johns, executive director of SFIG. "Allowing this type of practice is a short-sighted and unconstitutional idea. Not only would it do irreparable damage to the private mortgage market, undermining Congressional efforts to encourage private capital in the market, but it would also actually injure the local residents these efforts are supposed to be helping."
The SFIG brief argues that efforts by Richmond and MRP to seize loans held in PLS Trusts is unconstitutional and could do permanent damage to the U.S. home mortgage system. The brief points to significant risk on three levels:
►The market for securities issued by PLS Trusts will be fundamentally shaken if the structure can be pulled apart by municipalities seizing loans, especially by cherry-picking individual performing loans.
►Each PLS Trust which holds to-be-seized loans will be damaged by an amount that exceeds the face value of the loan, because the structure, as a fixed, geographically diverse pool, will be undermined. The market value of the interests in the PLS Trust will likely decline by an amount which far exceeds the face amount of the loans seized. This injury may well be uncompensable through post-seizure compensation proceedings.
►Each PLS Trust which holds to-be-seized loans will, at a minimum, lose the value of those loans - which the seizure program, by its nature and structure, seriously undervalues as part of its very premise. The consequences will fall upon public and private pension plans, retirement accounts, college savings accounts, hospital and university endowments, and other funds, and ultimately will damage the ordinary Americans who are the beneficiaries of such accounts.
The brief also demonstrates that the program would "harm prospective homeowners across the country by imposing new, unanticipated and unquantifiable risks upon investors in mortgages, depressing the value of mortgage-based investments, and impeding the return of private capital to the residential mortgage market."
SFIG represents over 150 distinct individual organizations from all sectors of the securitization market, including investors, issuers, financial intermediaries, law firms, accounting firms, technology firms, rating agencies, servicers, and trustees. The group is focused on educating members, legislators, regulators, and others about structured finance, securitization and related capital markets; building the broadest possible consensus on policy, legal, regulatory and other matters affecting or potentially affecting these markets; and advocating on behalf of the structured finance and securitization industry.