Bank of New York challenges California town’s plan to seize mortgages from securitized trusts

A California city’s plan to seize underwater mortgages from securitized trusts is being challenged in court by the Bank of New York Mellon as an illegal taking in violation of the U.S. and California constitutions.

The suit, filed in the U.S. District Court for the Northern District of California, asserts the city of Richmond plans to use its power of eminent domain to seize residential mortgages on properties that are worth less than owed to ostensibly help homeowners facing foreclosure.

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But according to BNY Mellon, the seizure program targets performing loans (loans that are current on their payments) and generates private benefits while leaving current investors “holding the bag.”

The dispute is about “the misuse of public power for private benefit,” the bank says.

According to a USA Today editorial, Richmond is trying to implement a program that “makes no sense” and plans to seize more than 600 loans for 80 percent of their currently assessed value.

The city did not respond to a request for comment on the suit.

According to the complaint, Richmond and Mortgage Resolution Partners LLC, the mortgage investment firm that has proposed the loan restructuring process, will reap substantial profits as the seized loans will be repackaged and sold to new investors.

(Click here to read the complaint on Westlaw.)

BNY Mellon says current investors will lose “tens of millions of dollars in loan principal” if the mortgages are seized.

The seizure program also allegedly involves the taking of loans on properties outside of the city’s limits, the suit says.

“The seizure program is pure financial engineering,” the complaint says.  “MRP and its investors, with the critical assistance of [the] city’s purported power of eminent domain, intend to take the loans for a fraction of their value and then flip them, reselling them in a new securitization.”

Further, the defendants’ methods are not in good faith, the bank adds, as their valuation method does not take into account a homeowner’s steady payment record.

Also named as defendants in the suit are the Richmond City Council and Gordian Sword LLP, a Delaware company established to create the seizure program and which allegedly controls MRP.

BNY Mellon contends the program violates the U.S. and California constitutions, as well as numerous federal, state and local laws, including the city’s own charter.

“By coercing transactions across state lines and threatening massive disruption to the national mortgage lending and securitization markets, [the program] conflicts with federal power under the Commerce Clause,” according to the complaint.  “It also runs afoul of the Contracts Clause, which bars states and their political subdivisions like the city from modifying private contracts.”

The bank seeks injunctive and declaratory relief to “avoid imminent and irreversible harm, not only to the trusts but to the national economy.”

On Aug. 9, the Federal Housing Finance Administration, the conservator of Fannie Mae and Freddie Mac, said it was considering legal or regulatory action to prevent Richmond from implementing the program.

According to the bank’s suit, MRP has entered similar agreements with North Las Vegas, Nev., and the California cities of El Monte, La Puente, Orange Cove, Pomona and San Joaquin.

Bank of New York Mellon v. City of Richmond, Cal., et al., No. 13-3664, complaint filed (N.D. Cal. Aug. 7, 2013).