A federal judge in San Francisco says he will toss out a lawsuit challenging a plan by Richmond, Calif., to seize underwater mortgages and write down their balances, agreeing with the city that the lawsuit is premature. U.S. District Judge Charles Breyer said he planned to grant a dismissal motion filed by Richmond. The city had argued that it could use its eminent domain powers to buy the loans at a discount only after taking several more steps, including a special vote by the City Council -- actions that have not taken place.
The ruling follows the council's decision on Sept. 11to continue exploring the program despite heavy pressure from the banking, mortgage and securities industries, including threats to cut off major sources of home loans to the largely blue-collar city near Berkeley. The bond firms have invested money, mainly from institutional investors such as pension funds, in securities backed by some of the mortgages in question. They contend that Richmond and its advisory firm, Mortgage Resolution Partners, are offering far less than market value for 624 targeted mortgages, most of which are not in arrears and some of which allegedly are not underwater. The Securities Industry and Financial Markets Association notes that Breyer said nothing about the industry's claims that using eminent domain to seize mortgages is unconstitutional," adding that "we fully expect the litigation will succeed on merit once the issue is ripe."