Richmond Rebuffed in Bid to Buy Loans Using Eminent Domain Threat

August 16, 2013
Los Angeles Times  
mortgage lending news

The city of Richmond, Calif., recently asked financial institutions to sell 624 troubled mortgages and threatened to seize them through eminent domain, but has been turned down. The loans aren't for sale, according to banks that provide customer service on the loans and watch over the trusts where the loans were pooled to back mortgage bonds. The loans at issue had been pooled with other mortgages to back bonds sold to investors without guarantees from government-sponsored entities such as Fannie Mae and Freddie Mac. Chapman University law professor Kurt Eggert, a scholar of mortgage securities, said the private securitizations have created such complexity and conflicts of interest that servicers can't or won't take actions that would benefit borrowers and investors alike. Steven Gluckstern, the head of a San Francisco investor group promoting the plan to have cities buy troubled mortgages, said loans that are impossible to sell underscore his belief that the private-label securitizations are "Frankenstein contracts or suicide pacts." Adopting Gluckstern's strategy, Richmond city officials have said they would use eminent domain — the civic power to compel the sale of property to be used for the public good — to seize the mortgages if the banks cannot or will not sell them. The plan has been challenged in a federal lawsuit by banks, including Wells Fargo, and by a group of prominent bond investors. Officials at Fannie Mae and Freddie Mac, which had invested in private-label securities, also have threatened to sue.
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