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California City Sued Over Eminent Domain Plan

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Lenders and bond investors filed a federal lawsuit against the city of Richmond, Calif., on Wednesday to prevent the city from using eminent domain to seize mortgages of distressed residential homeowners who owe more than their properties are worth in a bid to keep them in their homes.

The lawsuit, filed in a federal court in San Francisco, could become a precedent on whether other cities can follow Richmond’s lead to forcibly buy mortgages from investors at a price below the property’s current market value. The suit was filed on behalf of three mortgage-bond trustees, including Newport Beach-based Pacific Investment Management Co., BlackRock Inc. of New York and DoubleLine Capital of Los Angeles.

“Mortgage Resolution Partners is threatening to seriously harm average Americans, including public pension members, other retirees and individual savers through a brazen scheme to abuse government powers for its own profit,” said John Ertman, a partner at Ropes & Gray LLP, who is representing the investors, said in a news release announcing the lawsuit.

The city of Richmond is working with San Francisco-based Mortgage Resolution Partners (MRP), a private investment firm that has been pitching  the plan to U.S. cities and municipalities for more than a year. MRP first marketed the plan last year to San Bernardino County and two California cities, Fontana and Ontario, but none have implemented the controversial eminent domain  mortgage plan. A handful of other cities, like Newark, Seattle and North Las Vegas, are considering plans similar to that of Richmond

Richmond, which was hit hard by the housing crisis, became the first city in the country to press forward with the  controversial eminent domain mortgage plan, asking the holders of 624 underwater mortgage last week to sell the loans to the city at a discount. The results of this lawsuit will be closely watched by both Wall Street banks, who vigorously opposed the use of eminent domain to buy mortgages and a host of cities across the country that are considering emulating Richmond mortgage plan.

To view a copy of the complaint, click here.

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