SAN FRANCISCO (CBS SF)— A federal judge in San Francisco sided with the City of Richmond on Thursday in its effort to take over mortgages from hundreds of struggling homeowners.
U.S. District Court Judge Charles Breyer ruled that the city’s legislative process for approving the proposal is not yet complete, so it would be premature to issue an injunction requested by Wells Fargo and Deutsche Bank.
The preliminary injunction would have blocked the potential implementation of a plan by the city of Richmond to use eminent domain to force the sale of more than 600 underwater mortgages.
“It’s better for a court to not rule unless it appears this eminent domain process is essentially imminent,” Breyer said at the hearing in San Francisco.
Richmond is partnering with the investment firm Mortgage Resolution Partners in a plan to buy 624 mortgages to modify the loans and provide homeowners with more affordable payments.
The plan is meant to prevent foreclosures in a city where about half of its homeowners are underwater on their mortgages, meaning the homeowners owe more money than the home’s current value.
Richmond recently sent letters to lenders and said that if their offers weren’t accepted, the city would use its municipal power of eminent domain to force the sale of the mortgages.
However, the lawsuit filed last month by international law firm Ropes and Gray, LLP, on behalf of the two banks representing the bond investors holding the mortgages, argues that the use of eminent domain is unconstitutional.
Eminent domain is typically used to purchase private land for public use like infrastructure or parks.
John Ertman, an attorney with the firm, told the judge that the Richmond City Council meeting Tuesday night on the proposal represented “a significant development in this case.”
Ertman said the council addressed eminent domain at length at the meeting and voted 5-2 to reject a motion to scrap the plan to use it.
“It was clear at the hearing that there’s a passion in Richmond for this program,” he said.
Scott Kronland, an attorney representing the city, told the judge that the banks’ request was “like challenging immigration reform legislation before Congress adopted it.”
The City Council still has to approve a resolution of necessity authorizing the use of eminent domain and would need a supermajority of five votes to approve it.
Breyer agreed and declined to immediately issue the preliminary injunction, but gave both sides the opportunity to file briefs by Friday on whether the motion for the injunction should be dismissed or stayed. He said he would then make his formal ruling on Monday.
Kronland said the judge should dismiss the motion because Richmond is seeking other cities to join it in a joint powers authority for the plan.
“Having the case out there is an interference with the political process and other cities would be hesitant to join,” he said.
So far, the Southern California city of El Monte has expressed interest in joining Richmond, city officials said.
Ertman said the joint powers authority was “a red herring” and that the city was adamant about moving forward quickly with the plan.
Richmond Mayor Gayle McLaughlin attended Thursday morning’s hearing and called the judge’s decision not to grant a preliminary injunction “a great victory for us.”
McLaughlin also rejected the banks’ assertion that the injunction was necessary because the city was trying to quickly pass the legislation.
“We’re taking this step-by-step in a very careful, conscientious way,” she said.
Attorney’s for the banks declined to speak with reporters after the hearing. A written statement was expected shortly.
(Copyright 2013 by CBS San Francisco. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. Wire services may have contributed to this report.)