Pacific Investment Management Co. and BlackRock Inc. are among bond investors seeking a court order blocking Richmond, California, and Mortgage Resolution Partners LLC from seizing mortgages through eminent domain, saying the initiative would hurt savers and retirees.
The city’s plan is unconstitutional, according to a complaint filed yesterday by mortgage-bond trustees in federal court in San Francisco. The trustees, Wells Fargo & Co. and Deutsche Bank AG, were directed to take the action by investors in the debt that also include Jeffrey Gundlach’s DoubleLine Capital LP, said John Ertman, a partner at Ropes & Gray LLP.
“Mortgage Resolution Partners is threatening to seriously harm average Americans, including public pension members, other retirees and individual savers through a brazen scheme to abuse government powers for its own profit,” Ertman said in an e- mailed statement on behalf of investors.
The plan advanced last month with Richmond backing offers to buy 624 loans, making it the first city to push the idea so far forward. Those offers would need to be refused before the city could follow through with its mayor’s vow to invoke its potential powers to force sales of the mostly non-delinquent loans, so that homeowners could get their debt balances cut to less than the current values of their properties.
Investor Costs
The program would harm owners of mortgage bonds by paying them too little for loans, as well as damage communities by drying up lending, at least 18 trade groups representing asset managers, bankers, real-estate firms and builders have said in past statements. Costs to investors could exceed $200 million just on loans in Richmond, according to the complaint.
Proponents of the plan including Cornell University law professor Robert Hockett and Steven Gluckstern’s Mortgage Resolution Partners, which is advising municipalities and lining up private funds that would profit as the buyer of the loans, dispute those claims. They have said that the plan will survive court scrutiny.
At least a dozen cities still dealing with the fallout of worst slump in home prices since the Great Depression are studying the eminent domain idea. Others include El Monte, California, North Las Vegas, Nevada, and Irvington, New Jersey. Communities such as San Bernardino County, California, and Chicago abandoned the plan after considering it last year.
Comparable Trades
Under the program that Mortgage Resolution Partners has pitched, a private investment fund would buy loans from bond trusts for amounts less than current property values. The prices would be based on financial models or comparable trades and sanctioned by courts.