On December 5, ACLU-affiliated entities and borrower advocacy groups filed a lawsuit in the Northern District of California seeking to compel FHFA to produce “all [FHFA] records pertaining to the use of eminent domain to purchase mortgages.” Alliance of Californians for Community Empowerment v. Fed. Hous. Fin. Agency, No. 13-5618 (N.D. Cal. Dec. 5, 2013). Specifically, the plaintiffs seek to compel FHFA to respond to a FOIA request that demanded, among other things, (i) all communications and records of meetings between FHFA leadership and financial services industry trade associations and individual companies; (ii) all FHFA records regarding the City of Richmond’s proposal to seize certain mortgages; and (iii) all studies and analyses of the impact of eminent domain or principal reduction proposals relied upon by FHFA in support of materials it released in August 2013 outlining potential actions the agency could take in response to local efforts to employ eminent domain to seize mortgages. The complaint details the organizations’ position on eminent domain as a tool to implement principal reduction, which the organizations complain FHFA has improperly failed to pursue on its own. The request and complaint suggest that FHFA’s eminent domain position was unduly influenced by the financial services industry and “is advancing the interests of Wall Street firms at the expense of the nation’s homeowners.” This latest challenge of FHFA’s positions on eminent domain and principle reduction precede, potentially by days, an anticipated vote to confirm Representative Mel Watt (D-NC) to serve as FHFA Director.
On January 22, Michael Stegman, Treasury Department Counselor for Housing Finance Policy stated in remarks to an industry conference that the Treasury Department opposes expansion of the Home Affordable Refinance Program (HARP) to include loans originated after the current May 31, 2009 cut-off date. Treasury believes that few loans originated after that date are underwater, and that expanding the eligibility date would only prolong market and investor uncertainties. Treasury also does not support efforts by some local jurisdictions to employ eminent domain to seize and restructure underwater mortgages, stating that the administration instead supports legislation to increase refinancing opportunities. Dr. Stegman also discussed housing finance reform generally—he expressed support for the ongoing Senate efforts to reform Fannie Mae and Freddie Mac, and indicated that the Treasury Department plans to facilitate reform of the private label securities sector by holding “a series of conversations with relevant regulators, market participants, and other stakeholders.”
On November 6, the U.S. District Court for the Northern District of California dismissed without prejudice as not yet ripe for determination a suit by investors seeking to preempt a California city’s plan to use its eminent domain authority to seize certain mortgages. Bank of N.Y. Mellon v. City of Richmond, No. 13-cv-3664-CRB, slip op. (N.D. Cal. Nov. 6, 2013). The court described the suit as “nearly identical” to one the court dismissed in September. Wells Fargo Bank, N.A. v. City of Richmond, No. 13-3663, slip op. (N.D. Cal. Sept. 16, 2013). The court held that the investors’ claims are not ripe under Article III considerations, explaining that allowing the parties to intervene before the city formally implements the program by actually attempting to use its eminent domain power to seize a loan would stretch the role of the judiciary beyond what is reasonable to maintain judicial efficiency. The court was not persuaded by the investor’s argument that, unlike in the prior dismissed action, the investors here requested and briefed declaratory relief, which should be subject to a relaxed standard. Further, the court held the claims are not ripe under a prudential doctrine, reasoning that (i) the case is not fit for review because an actual dispute has not yet materialized and is dependent on a factual scenario that may never play out, and (ii) the investors face no imminent, irreparable harm.
On September 16, the U.S. District Court for the Northern District of California dismissed one of two suits filed recently by investors to preempt a California city’s plan to seize certain mortgages using the government’s eminent domain authority. Wells Fargo Bank, N.A. v. City of Richmond, No. 13-3663, slip op. (N.D. Cal. Sept. 16, 2013). The court restated its decision reported last week that the mortgage investors’ claims were not ripe for action and further held that the case must be dismissed, instead of stayed, because the “[r]ipeness of the claims does not rest on contingent future events certain to occur, but rather on events that may never occur”—i.e. the city may not ever move forward with its seizure plan. The decision only addressed the timing of the suit, and did not reach the merits of the investors’ claims that the city’s plan, among other things, will violate the U.S. Constitution’s Takings Clause, Commerce Clause, and Contract Clause, as well as the state’s statutory prohibitions against extraterritorial seizures. A second similar action filed by a separate group of investors remains pending.
On September 11, the California city of Richmond reportedly voted to proceed with a plan to employ its eminent domain authority to seize certain mortgages. As previously described, the city recently demanded that owners and servicers of 626 home mortgages sell the loans to the city or face seizure. The city proposed to then write down the principal of the purchased mortgages and sell the loans to new investors. On September 12, a U.S. District Court hearing challenges to the city’s action declined to enjoin the city’s plan at this time, finding that the issue is not yet ripe for determination. The court did not decide on the city’s pending motion to dismiss, but stated it will rule by September 16 on whether dismissal is appropriate or whether that motion also should be put on hold.
Investors Sue to Preempt Locality’s Planned Seizure of Mortgages Using Eminent Domain; FHFA Outlines Potential Responses
On August 7, trustees representing the interests of investors in mortgage backed securities filed two separate suits to halt the planned use of eminent domain by the city of Richmond, California to seize a group of mortgages. Wells Fargo Bank, N.A. v. City of Richmond, No. 13-3663 (N.D. Cal., complaint filed Aug. 7, 2013); Bank of NY Mellon v. City of Richmond, No. 13-3664 (N.D. Cal., complaint filed Aug. 7, 2013). The city recently threatened to seize 626 mortgages if the owners and servicers of those debts do not agree to sell the mortgages to the city. The complaints allege that the city is seeking to use its eminent domain power impermissibly to generate profits for private investors. The trustees explain that the city’s plan primarily involves performing loans and would value those loans at steeply discounted prices rather than the loan balance, under the guise of seizing “underwater” mortgages to prevent future defaults and foreclosures. The complaints assert that the vast majority of the loans are not at imminent risk of default and are located outside of the city, and, as such, the seizure plan will violate the U.S. Constitution’s Takings Clause, Commerce Clause, and Contract Clause, as well as the state’s statutory prohibitions against extraterritorial seizures. The trustees seek a declaration that the eminent domain plan violates the U.S. Constitution, the California Constitution, and other state laws, and an order enjoining the city from implementing the program.
On the same day, the FHFA released a memorandum prepared by its general counsel regarding eminent domain, based in part on public input solicited last year. In a separate statement, the FHFA states that it could: (i) 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; (ii) 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 (iii) take such other appropriate actions to respond to market uncertainty or increased costs created by any movement to put in place such programs.
On July 29, the California city of Richmond reportedly sent letters to the owners and servicers of the mortgages on 626 homes in the city, informing those entities that if they do not accept the city’s offer to purchase the mortgages, the city will employ its eminent domain powers to seize the mortgages. The city is demanding to buy both current and delinquent loans, and the first pool of 626 loans does not include any homes with large second mortgages. It intends to write down the principal of the purchased mortgages in an effort to avoid additional foreclosures, and then sell the loans to new investors. If the city follows through on its ultimatum, it would be the first locality to use eminent domain in this way. Several other localities have considered or are considering such action, including North Las Vegas, Nevada, which recently announced its intent to assess the potential use of eminent domain.
On June 19, the city council of North Las Vegas, Nevada, reportedly voted to explore the potential use of the government’s eminent domain powers to seize underwater mortgages from trusts, write down the loan principal, and re-sell the altered mortgages to new investors. In January, a California county that had threatened such a course voted to abandon the concept. Since then, several other California cities have signed agreements with a third-party to explore the issue, with North Las Vegas now deciding to pursue a similar path. To date, however, no locality has taken the next step to implement a mortgage seizure plan.
On January 24, a Joint Powers Authority established by San Bernardino County decided not to pursue a proposal under which the County would use eminent domain power to seize underwater mortgages from private trusts and provide principal reduction for the borrowers. In announcing the decision, the chairman of the Authority explained that the decision was based on warnings from experts about the destabilizing effect on the housing market such a policy would have, and noted that county residents did not favor the proposal. Instead, the Authority approved an agreement to work with banking, mortgage, real estate, and investment firms to connect homeowners with appropriate mortgage assistance programs. San Bernardino had been closely watched since it began pursuing the concept last year. Its decision could portend how other localities will proceed. At least one recent report indicates that several other localities that have been considering eminent domain proposals already were wary of the concept even before San Bernardino’s decision.