Seizing Mortgages: The Constitutional Issues
As outlined in my previous post, opponents of the Richmond plan criticize it for its potential impact on the financial market. Opponents, like Wells Fargo, are also quick to declare the plan is unconstitutional.
The basis for this argument lies in the transient nature of a mortgage loan. When a person buys a house, the mortgage loan generally does not stay with the homeowner. Instead, the loan – or pieces of it – are sold or transferred between banks, packaged into an investment product, placed into a trust, and purchased by an investor who may be from out-of-state.
Once the loan is purchased by an out-of-state investor, Richmond may not be able to seize these loans. Wells Fargo argues the U.S. Constitution only permits seizure by creditors of the same state. Thus, if a Wisconsin resident invested in a residential mortgage-backed (RMB) trust that includes a mortgage loan from a Richmond home, the mortgage would technically be located in Wisconsin, and out of Richmond’s reach.
Similarly, Wells Fargo alleges the seizure of an out-of-state loan may violate the Dormant Commerce Clause. The clause prohibits state action that regulates interstate commerce. In this case, Richmond’s seizure of an out-of-state loan may constitute an attempt to regulate interstate commerce for the nationwide housing market.
California law may also prohibit Richmond from seizing out-of-state loans. California’s eminent domain law restricts its applicability to property within its territorial limits. Since some of the loans Richmond may seize are held in trusts located outside the county or state, Wells Fargo argues Richmond lacks authority to seize the loans under California law.
And, even if Richmond can seize out-of-state loans, it is unclear if Richmond will provide just compensation for the taking under the Fifth Amendment. Under the plan, Richmond plans to offer lenders 80 percent of the home’s currently assessed value, regardless of the amount of money still owed on the mortgage. Opponents of the Richmond plan argue only paying 80 percent of a home’s fair market value does not constitute just compensation.
Richmond failed to get a supermajority to enact its eminent domain plan. These constitutional issues will likely be set aside for the time being as Richmond works to find other ways to get its plan approved. We will follow the Richmond plan’s progress and provide updates on this blog.