Richmond’s eminent domain plan is a ploy for profit, critics say

In a new legal challenge, financial industry opponents of the city of Richmond’s plan to seize underwater home loans call the gambit a disguised attempt to profit at the expense of everyday investors.

Richmond is threatening to use eminent domain to remove troubled loans from mortgage bonds in order to write down the principal for homeowners. The novel plan, promoted by San Francisco investment firm Mortgage Resolution Partners, seeks to stop another wave of foreclosures in the working-class Northern California city.

The plan has drawn fierce opposition from the financial industry, which has banded together in a lawsuit challenging the city’s authority. In a new filing late Thursday, the plaintiffs accused the city and Mortgage Resolution Partners of cherry-picking the most valuable loans and forcing their sale at less than market value — so the firm can make a profit.

The effect will be to rob owners of mortgage securities across the country, the opponents contend, including everyday investors whose retirement savings are managed by some of the biggest bond funds in the nation.

“MRP is renting local government power to take money out of the pockets of savers and retirees across the U.S. and line their own pockets,” said a statement from attorney John Ertman of Ropes & Gray, the lead counsel for the banks and bond house seeking to shut down the program before it takes hold and spreads to other cities.

An MRP official sharply disputed the assertions, and said the mortgage-bond investors could themselves step in and help finance the program — and share in the profits at the end, if any.

“Why don’t they sit down and negotiate with the city and come to a deal that works for everybody?” said MRP Chief Strategy Officer John Vlahoplus.

Calls to the mayor’s office in Richmond went unreturned Friday, and the city attorney’s office said no one was available to respond. Efforts to reach attorneys at Altshuler Berzon, a San Francisco law firm representing the city, were unsuccessful.

Opponents of the eminent domain seizures contend that Richmond and its partner firm have mischaracterized the first 624 loans the city has targeted. The majority of the loans in question are either not underwater — meaning owners owe more than the homes are worth — or not delinquent.

About 31% of the targeted loans do not exceed the current value of the home, and so are not at elevated risk of default, according to the filing. About 10% of the borrowers have at least 20% equity in the homes, according to a loan-by-loan analysis performed by Phillip R. Burnaman II, an investment banker hired by the plaintiffs as an expert on mortgage securities.

Of the borrowers who are underwater, 43% are current on their loan payments, the plaintiffs argue. In all, 68% of the borrowers have not fallen behind, and an additional 5% are only one payment behind, according to the filing.

The loans had been bundled up to back mortgage bonds issued by private parties, without guarantees from Fannie Mae, Freddie Mac or other government-sponsored entities.

Proponents of the Richmond plan have argued these types of loans are rarely modified to keep owners in their homes. But the plaintiffs assert that about half of the loans have already been modified by lenders.

Further, more than half the borrowers ran up their loan balances during the housing boom by refinancing, allowing them to turn inflated home equities into cash. The loans total $53 million more than the original purchase prices of the homes, according to the filing.

Vlahoplus, of Mortgage Resolution Partners, disputed the analysis, saying he’s confident that all of the 624 borrowers are indeed underwater. The city’s appraisals of the properties, he said, were handled by a firm whose work has been highly rated by securities trade groups.

About two-thirds of the borrowers have indeed stayed current on their loans, he said. But helping them now — before they default — is the best way to make sure they stay current on the loans and thereby limit further damage to Richmond’s battered neighborhoods.

“The intent here is to help the neighbors,” he said.

The filings were made by attorneys for Wells Fargo Bank and Deutsche Bank, which act as trustees overseeing the pools of loans and provide customer service on them — collecting bills, paying investors in the mortgage pools and handling delinquencies and foreclosures.

The banks say they were directed to file the suit by huge bond-investment firms that own the mortgage-backed securities.

These firms — Pacific Investment Management Co. in Newport Beach, BlackRock Inc. of New York and DoubleLine Capital of Los Angeles — say the money comes from pension funds and 401(k) accounts, meaning ordinary workers would be the losers if cities profit at their expense.

Mortgage Resolution Partners last year pitched the eminent domain plan to San Bernardino County and two of its cities, Fontana and Ontario. That county and the two cities formed a Joint Powers Authority to consider the eminent domain idea but then shelved it after Wall Street groups voiced strong opposition and little public support was heard.

scott.reckard@latimes.com

Twitter: @scottreckard