By Nick Timiraos | The Wall Street Journal
Banks representing some of the nation’s largest bond investors filed suit against the city of Richmond, Calif., on Wednesday to block plans by city officials to seize and buy mortgages using their powers of eminent domain.
The lawsuit, filed in federal court in San Francisco, could serve as a key test for whether a city can move forward with such a strategy, which would allow it to forcibly buy mortgages from investors at a price potentially below the property’s current market value. The city would then reduce the loan balance and refinance the mortgage, resulting in a lower mortgage payment for the borrower. The aim is to help struggling homeowners avoid foreclosure.
The legal challenge could serve as a key test for whether cities from Newark, N.J., to Seattle are able to follow Richmond’s lead.
The lawsuit was filed by three mortgage-bond trustees, units of Wells Fargo & Co. and Deutsche Bank, that were directed to act by a group of investors, including BlackRock Inc., Pacific Investment Management Co., as well as Fannie Mae and Freddie Mac, the government-supported mortgage companies.
