We all knew this was coming (see my post from July 23).  If you poke a sleeping giant, it’s going to file a lawsuit against you in federal court.  Yesterday, in response to the City of Richmond’s preliminary actions to condemn underwater mortgages, three heavy-hitting banks fired back by filing lawsuits in California federal court to block the condemnations. 

According to multiple news sources (here, here and here), Wells Fargo Bank, Deutsche Bank and Bank of New York Mellon Corp. have asked the court to find the City’s plan unconstitutional and block its implementation.  The banks argue that the plan is an abuse of the government’s power because there is no public use attached to this exercise of eminent domain.  Further, the banks claim the plan is just a way for Richmond and Mortgage Resolution Partners (MRP) to line their pockets at the expense of investors. 

The City of Richmond was the most recent municipality to buy into MRP’s plan of seizing underwater mortgages though eminent domain in an attempt to help upright the housing market and reduce the number of foreclosures.  Last week, the City sent letters to about 30 trustees and loan servicers offering to purchase over 620 mortgage loans, which is the first step in the MRP plan.  Apparently, the letters did not go over well. It should be noted, no offers were made on any mortgages held by Fannie Mae or Freddie Mac.  (I wouldn’t want to stir up that federal hornet’s nest either.)

While it seems like lenders are jumping the gun a bit in filing suit, since there has yet to be any eminent domain action filed, I think they may be sending a message and that message is clear: back off.  Hopefully, MRP will be true to it’s word and defend any lawsuits against its plan because I think these first lawsuits are only the beginning.  And maybe Richmond won’t flinch and will proceed with filing eminent domain actions anyway.  Wouldn’t that be exciting!