Using Eminent Domain to Take Bondholders Value

Richmond, California, is planning to buy residential mortgages in low-income areas for as little as 25 cents on the dollar and may force the sales under eminent domain laws, moving forward with a controversial program that would potentially seize home loans from investors.

Richmond, a city of about 106,500 on the east side of San Francisco Bay, sent letters to 32 servicers and trustees with offers to purchase 624 mortgages whose loan balance exceeds the property value, officials said on a conference call. The loans are the first that the city plans to buy or seize under legal powers unless loan servicers agree to sell, Mayor Gayle McLaughlin said.

“Our community is suffering and we’ll stand together until the damage gets reversed,” McLaughlin said.

Richmond is the farthest along in a plan advocated by Steven Gluckstern’s Mortgage Resolution Partners LLC for U.S. cities to confiscate mortgages and write them down in an effort to help homeowners escape oversized debt burdens. The idea has drawn opposition from bondholders such as Pacific Investment Management Co. and DoubleLine Capital LP and at least 18 trade groups representing the finance industry, homebuilders and real estate firms.

“Both federal and California law clearly show that this scheme is illegal,” said Tom Deutsch, executive director of the American Securitization Forum, a trade organization, said in a statement.Other opponents, including bondholders, say it would cause unfair losses to investors holding some form of mortgage debt such as pension funds, push lenders to withdraw from markets and expose cities to legal risks. None of the 32 servicer and bond trustees that oversee the loans are likely to sell willingly, Chris Killian, head of the securitization group for the Securities Industry and Financial Markets Association, Wall Street’s largest lobbying organization, said in a telephone interview.

“You just can’t really sell performing loans out of securitizations,” Killian said. “Additionally, everybody we talk to in the industry thinks this is a bad idea that will be bad for the mortgage markets.”

Fewer than a third of the loans that Richmond is offering to buy are delinquent.

via Richmond Escalates Eminent Domain Plan With Loan Offers – Bloomberg.

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