• Cities' Use of Eminent Domain Raises Serious Constitutional and Damage Issues for Lenders, Loan Servicers and Trustees of Securitized Trusts
  • August 17, 2013 | Authors: David N. Anthony; John C. Lynch; R.J. Nutter; Ethan G. Ostroff
  • Law Firms: Troutman Sanders LLP - Richmond Office ; Troutman Sanders LLP - Virginia Beach Office
  • As politicians look for methods to assist local voters unable to pay their mortgages, cities may begin to exercise their eminent domain powers to seize homes and mortgages in order to prevent foreclosure. The city of Richmond, California recently became the newest proponent of this strategy, with its Mayor announcing plans to seize the mortgages owned by almost half of its citizens and then to refinance them. Richmond is not alone - other cities in California, Massachusetts and elsewhere across the country are reportedly considering similar plans.

    As noted by Troutman Sanders’ R.J. Nutter II in a recent article in Law360, this strategy “institutionalizes the problem rather than let the market work its very healthy way of responding to pressures.” The seizure of private property by cities also raises significant constitutional questions because of its interference with private contracts between lenders and borrowers. It is likely to lead to more litigation as financial institutions become entangled in disputes with both municipalities and homeowners.

    Cities pursuing this approach can expect litigation with lenders and borrowers concerning both the constitutionality of such a program and just compensation for any property taken. While the threat of offensive litigation against cities challenging their authority to use eminent domain to seize mortgages previously was sufficient to stop San Bernadino County, California from pursuing this approach to preventing foreclosure, mere threats are no longer enough in the current market.

    Just last week, in response to correspondence from the city of Richmond stating it would either purchase loans held in a residential mortgage-backed security at significantly reduced amounts or seize mortgages, three trustees for securitized trusts filed lawsuits in federal court in California to prevent Richmond from seizing home loans through eminent domain, arguing the program is unconstitutional. The Federal Housing Finance Agency (FHFA) issued a statement last week, indicating it may sue states, municipalities and counties that use eminent domain to seize home loans. FHFA stated that seizure threatens the stability of Fannie Mae, Freddie Mac and a dozen federal home loan banks and that it will "limit, restrict or cease (GSE and FHLB) business activities within the jurisdiction of any state or local authority employing eminent domain to restructure mortgage loan contracts."

    This strategy is not limited to residential landowners. The Metropolitan Pier and Exposition Authority in Chicago recently filed an eminent domain lawsuit against Lakeside Bank after negotiations to purchase the property failed. The purpose of the suit is to seize land for a $540 million plan to build a new 10,000-seat event center anchored by DePaul University, as well as hotels, restaurants and other entertainment venues in the area.