BlackRock and Pacific Investment Sue Richmond over Eminent Domain

Banks representing some of the nation’s largest bond investors filed suit against the city of Richmond, Calif., to block plans by city officials to seize and buy mortgages using their powers of eminent domain.

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The lawsuit, filed in federal court in San Francisco, could serve as a key test for whether a city can move forward with such a strategy, which would allow it to forcibly buy mortgages from investors at a price potentially below the property’s current market value. The city would then reduce the loan balance and refinance the mortgage, resulting in a lower mortgage payment for the borrower. The aim is to help struggling homeowners avoid foreclosure.

The lawsuit was filed by three mortgage-bond trustees, units of Wells Fargo & Co. and Deutsche Bank, that were directed to act by a group of investors, including BlackRock Inc., Pacific Investment Management Co., as well as Fannie Mae and Freddie Mac, the government-supported mortgage companies.

Filing suit against the city of Richmond, the plaintiffs alleged that the city’s proposal amounts to an “unconstitutional application of eminent domain” and a “brazen scheme.” The Federal Housing Finance Agency announced that it was considering ceasing to do business in municipalities that pursue this course.

The big players in the bond markets are angry that they’re being forced to accede to the demands of a small city in California. Before they fight city hall, the plaintiffs should appreciate that use of eminent domain to seize intangible assets like mortgages has a solid history. Federal courts have long sanctioned the taking of everything from shares of stock to contract rights, insurance policies and even hunting rights.

The lawsuit alleges that the proposed use of eminent domain is unconstitutional because it benefits a small group of Richmond citizens at the expense of out-of-state investors, violating the law on interstate commerce. The lawsuit also argues that loans aren’t being seized for a valid public purpose—a key criterion for a city that invokes eminent domain.

As real estate professionals what do you think about distressed cities trying to help out their residential home owners through eminent domain? Please share your thoughts with us?

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