City of Richmond to Fight Lawsuit Over Eminent Domain Plans

The City of Richmond is preparing to fight a lawsuit over its plans to save more than 600 homes with troubled mortgages by taking them through eminent domain.

The law firm Ropes & Gray filed the suit in federal court in San Francisco Wednesday on behalf of Wells Fargo and Deutsche Bank, calling the city's move unprecedented and unconstitutional. The banks represent the bond investors, including government-backed  mortgage agencies Fannie  Mae and Freddie Mac,  holding the mortgages.

Richmond wants to refinance the loans under terms that the homeowners can afford. Mayor Gail McLaughlin says the city is acting on behalf of its struggling residents.

"We think that what the banks are doing is without merit," McLaughlin says. "We do not fear the public courtroom, and we believe our legal reasoning will prevail outside the courtroom and inside the courtroom."

The plantiffs say the move will benefit only a small group of Richmond locals and the San Francisco investment firm that's helping the city.

If Richmond is successful, it will be the first city to use eminent domain to address its housing crisis. Eminent domain is a municipal power usually reserved for purchasing land for public use, such as sidewalks or parks.

About half of homeowners with mortgages in Richmond are underwater, some owing three to four times as much as they paid for their homes. City officials already have sent letters to homeowners offering to buy loans at a portion of their market value.

For example, a home purchased for $400,000 but valued at $200,000 would have its loan bought for $160,000 by the city. Other cities, including Seattle and San Bernardino, also have considered the strategy, which is opposed by bankers and realtor associations.