Despite a lawsuit and threats from the securities industry and the federal government to cut off its credit, the City Council in Richmond, California voted this morning to take another step forward in a plan to seize underwater mortgages using eminent domain.   Richmond has already sent letters to 32 mortgage servicers offering to buy 624 mortgages at the actual value of the collateral property, often a fraction of the outstanding principal balance.   The intent is to restructure the performing loans to reflect their actual collateral value and repackage them for sale on the secondary market.

The letters, along with Richmond's implied intent to take the mortgages by eminent domain if servicers did not sell them voluntarily, has prompted a suit seeking a preliminary injunction against the city filed by Wells Fargo and Deutsche Bank.   

Today's council vote endorses a proposal from Mayor Gayle McLaughlin which will establish a Joint Powers Authority to coordinate with other cities in expanding the plan which is being promoted in many cities in California and elsewhere by Mortgage Resolution Partners (MRP).   The investor group hopes to work with the cities in the actual restructure and re-securitization of loans, and according to some reports, expects to make in excess of $4,000 each. The vote does not authorize the use of eminent domain, this would require a supermajority vote of the council.

When the eminent domain plan was first unveiled by San Bernardino (California) County over a year ago it triggered strong pushback from the securities industry, especially SIFMA, its trade organization.  SIFMA has repeatedly stated that residents of any city pursuing such a plan would find it difficult to obtain mortgage credit.  This threat has been reinforced by the Federal Housing Finance Agency which has stated it would not allow Fannie Mae and Freddie Mac for which it is conservator to guarantee or purchase residential loans in such jurisdictions. 

Since San Bernardino came forward with its proposal other California cities, North Las Vegas, Chicago, and Brockton, Massachusetts announced similar plans.  Most have now said they do not intend to proceed.

City council members opposed to the plan said that using eminent domain would put Richmond at risk of expensive lawsuits that could destroy the city's finances as well as tightened and more expensive access to credit.   NBC News said that Richmond had no takers last month when the successor to its redevelopment agency put $34 million of bonds up for sale to refinance previous debt. The eminent domain plan had been disclosed to the U.S. municipal bond market.

Reuters quoted McLaughlin as saying Richmond's residents have been "badly harmed by this housing crisis." She defended the plan and the partnership with MRP during a heavily attended and often contentious city council meeting that actually began on Tuesday evening saying, "Too many have already lost their homes."

The first hearing on the Well Fargo/Deutsche Bank suit will be held on Thursday in U.S. District Court.