A boarded-up foreclosed property in Richmond, right. A federal judge tossed out a lawsuit challenging the city's proposal to seize underwater mortgages and write down the balances to stem a tide of foreclosures. (Justin Sullivan / Getty Images)
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A federal judge in San Francisco said Thursday that he would toss out a lawsuit challenging a plan by Richmond, Calif., to seize underwater mortgages and write down their balances, agreeing with the city that the lawsuit is premature.
U.S. District Judge Charles Breyer said he planned to grant a dismissal motion filed by Richmond. The city had argued that it could use its eminent domain powers to buy the loans at a discount only after taking several more steps, including a special vote by the City Council -- actions that have not taken place.
The ruling follows the council's decision early Wednesday to continue exploring the program despite heavy pressure from the banking, mortgage and securities industries, including threats to cut off major sources of home loans to the largely blue-collar city near Berkeley.
"It's Richmond two and Wall Street zero this week," said Amy Schur, campaign director for advocacy groups backing the principal-reduction plan.
"Judge Charles Breyer confirmed what people in Richmond have been saying all along," Schur said. "It's a no-brainer thatWells Fargo's case against the city of Richmond does not have standing."
Wells Fargo Bank and Deutsche Bank, acting as trustees for mortgage bonds sold during the housing boom, had sued on behalf of the giant bond-trading firms BlackRock Inc., Pacific Investment Management Co. and DoubleLine Capital.
The bond firms have invested money, mainly from institutional investors such as pension funds, in securities backed by some of the mortgages in question.
They contend that Richmond and its advisory firm, Mortgage Resolution Partners, are offering far less than market value for 624 targeted mortgages, most of which are not in arrears and some of which allegedly are not underwater.
The city denies the allegations, saying its valuation of the mortgages and home values was produced by highly respected real estate analysts.
The banks had asked Breyer to halt the program while the merits of the suit can be determined. But the said he would not consider doing so until the threat of seizure was "imminent."
The Securities Industry and Financial Markets Assn. noted that Breyer had said nothing about the industry’s claims that using eminent domain to seize mortgages is unconstitutional and “would represent a flagrant misuse of a municipality's power.”
“We fully expect the litigation will succeed on merit once the issue is ripe,” the trade group said.
Richmond Mayor Gayle McLaughlin said the city was pursuing its "step-by-step" process because "the banks and the federal government have not provided a fix."
“I was quite pleased that Judge Breyer made statements about the democratic process and how city governments have their processes to go through, including public hearings,” McLaughlin said. “And that all takes time.”
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