Seizing Mortgages: The Impact on the Financial Markets

January 27, 2014

The Richmond eminent domain plan has attracted a great deal of attention since the city first introduced it. Many approved of its purpose: to help the poor fight to keep their heads above water when their homes were so far underwater.

There are many, however, who do not share this sentiment. Banks and investors are concerned about the plan’s impact on the financial markets. Banks have alleged there could be financial losses exceeding $200 million.

How could such financial losses occur? The answer is laid out in a September 2013 lawsuit filed against Richmond by Wells Fargo bank as the trustees for residential mortgage-backed (RMB) securitization trusts. These trusts consist of mortgage loans made to homeowners in Richmond. The investors of the trusts include public and private pension funds, 401(k) plans, insurance companies, mutual funds, university endowments, and individual retirees and individual investors across the country.

The lawsuit alleges Richmond’s seizure of the mortgage loans in the RMB securitization trusts would devalue the trusts’ assets since the seized mortgages are removed from the trusts. Once removed, the entire trusts would have to be revalued and likely at a much lower rate. Opponents of the Richmond plan have stated that removing mortgages from these established trusts would wreak havoc on the trusts, “upending the diversification and risk mitigation features” of the financial investment product.

Those concerned about the potential havoc can breathe a temporary sigh of relief. Richmond city council members failed to obtain a supermajority of votes needed to enact its eminent domain plan. However, the city is not planning to stop its plan. In fact, it is now seeking other communities to partner in its eminent domain plan to create a joint powers authority. If it is successful, the city would then only require a simple majority of council votes to enact the eminent domain plan.

It will be very interesting to see if other communities will partner with Richmond since several American cities have considered such a plan, but ultimately backed away. We will follow the Richmond plan’s progress and provide updates on this blog.

If you have questions about this blog post, please contact Attorney Streck at [email protected] or 608.283.6723.

Kevin Du
Kevin Du