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The Continuing Saga of Eminent Domain of Mortgages By Local Governments in California

Posted By USFN, Monday, August 11, 2014
Updated: Tuesday, October 13, 2015

August 11, 2014

 

by Kayo Manson-Tompkins
The Wolf Firm
USFN Member (California)

The concept of eminent domain being used by local governments in California to seize underwater mortgages began in 2012. This concept was created not by local governments, but by a private entity named Mortgage Resolution Partners (MRP). The concept was to have local governments use eminent domain to seize underwater mortgages, permit private investors to purchase an existing mortgage at a discounted rate and then create a new mortgage at the reduced amount thus reducing the payment for the borrower. MRP spearheaded this concept due to the number of foreclosures that might result in vacant properties which, in turn, would blight local communities. Although on the surface it may seem that this concept was for the betterment of the public, in actuality this “concept” appears to be a private entity taking private property for a private use.

The True Meaning of Eminent Domain

California Constitution Article I § 19 grants state and local governments the power of eminent domain, where private property is taken for public use upon payment of just compensation. Typically eminent domain is used to take over structures to clear the path for a highway, road, public school, post office, fire department, library, or other structure for use by the public. This section also enables state or local governments to exercise the power of eminent domain for the purpose of protecting public health and safety, preventing serious criminal activity, responding to an emergency, or remedying environmental contamination that poses a threat to public health and safety.

This section does not, however, grant the power to state or local governments to exercise the power of eminent domain for the purpose of taking private property for private use. Furthermore, this section does not allow a local government to use the power of eminent domain to strong-arm lenders to take less than just compensation for the sale of its loans even if such sale were to result in the owner of a residence being allowed to remain in the property. Nor does it allow a private entity to facilitate a new mortgage with lower payments for the owner, obtain closing fees, and then share fees with the local government that used the power of eminent domain to enable the taking.

California Statute Governing Eminent Domain

Pursuant to California Code of Civil Procedure § 1240.030, the power of eminent domain may be exercised to acquire property for a proposed project only if all of the following are established: (a) The public interest and necessity require the project; (b) The project is planned or located in the manner that will be most compatible with the greatest public good and the least private injury; and (c) The property sought to be acquired is necessary for the project.

As indicated above, although the justification indicated for using eminent domain is to avoid blight in the community, which is a public purpose, the taking of an underwater mortgage ultimately benefits the owner of the private property and not the public as a whole. Therefore, what MRP and the local governments are attempting to do by using eminent domain does not meet the requirements of CCP § 1240.030.

San Bernardino County
The attempt to use eminent domain powers by local governments is not new to California. MRP first approached the County of San Bernardino with this proposal. The county formed a joint-powers authority with the cities of Ontario and Fontana in order to consider MRP’s proposal. Once the news was out about MRP’s proposal, numerous industry groups including the American Bankers Association, the California Bankers Association, and the Mortgage Bankers Association, banded together to oppose this proposal. Furthermore, U.S. Rep. John Campbell (R-Irvine, CA) introduced legislation to prohibit government sponsored entities (GSEs) from purchasing or guaranteeing loans in counties or cities that use eminent domain to seize underwater mortgages. On August 9, 2012, the Federal Housing Finance Administration said it “has significant concerns about the use of eminent domain to revise existing financial contracts, the resulting loss of which will ultimately be borne by the taxpayers and would have a chilling effect on the extension of credit to borrowers and investors.” As a result of this tremendous outcry, the JPA decided against considering MRP’s proposal.

City of Richmond
When San Bernardino County decided against MRP’s proposal, and due to the impending federal legislation, MRP set its sights on the city of Richmond, California. Richmond’s seizure program is limited to loans held by residential mortgage-backed securitization trusts (RMBS Trusts) and excludes GSEs and loans held by banks. This is to minimize opposition from local banks and federal agencies and target only performing loans that were under water. The seizure program is intended to assist homeowners at risk of defaulting on their mortgage loans and thereby somehow avoid urban blight. However, as indicated above, the target is “performing loans.” In actuality, it is intended to generate significant sums for MRP and its investors with payment to the city in exchange for the use of its eminent domain powers, and will likely generate private benefits for the homeowners selected. The seizure program conflicts with federal power under the Commerce Clause. It runs afoul of the Contracts Clause. In effect, the city seeks to abrogate debts of its citizens owed to out-of-town entities and permit a local speculator to reap the profits.

The city of Richmond contacted the RMBS Trusts, proposing to purchase the mortgages at 80 percent of the fair market value. When the RMBS Trusts declined, the Richmond’s mayor sent a letter to the RMBS Trusts on July 31, 2013, stating that if the financial institutions do not cooperate, the city will seize the loans using eminent domain in the following fashion: (1) have a condemnation hearing; (2) file an eminent domain suit in California; and (3) use an expedited procedure known as “quick take” to obtain a court order giving the city possession of the loans. As a result of the threatened action, the securitized trusts of Wells Fargo Bank and Deutsche Bank filed a lawsuit seeking injunctive and declaratory relief against the city of Richmond in the U.S. District Court for the Northern District of California. A similar suit was filed by the securitization trust of Bank of New York Mellon. Unfortunately, these cases were both dismissed within two months of the filing. The court held that a claim is not ripe if it rests on “contingent future events that may not occur.” Furthermore, it held that the Fifth Amendment taking claim asserted by the RMBS Trusts was premature until the government had in fact taken something and denied just compensation. The RMBS Trusts filed appeals in the U.S. Court of Appeals for the Ninth Circuit, which were consolidated by the court; however, the appeals were dismissed on May 21, 2014.

The city of Richmond is one vote short of approving the MRP proposal. There are several other municipalities (North Las Vegas, NV; El Monte, CA; La Puente, CA; Orange Cove, CA; Pomona, CA; and San Joaquin, CA) and likely more in further states, that are waiting to hear whether the city of Richmond proceeds with its efforts to exercise its powers of eminent domain. Until then, the saga of eminent domain of mortgages by local governments in California will continue.

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Summer 2014 USFN Report

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