You knew this was coming, right?
First, there was the lawsuit to stop the program by which Richmond CA wants to purchase loans by city residents from the banks at market rates, then offer the homeowners new mortgages based on market values — and if the banks don’t go along, the city will use eminent domain to seize the mortgages.
Then there was yesterday’s legal filing by the banks, which is more about PR than the laws of the state of California. From the LA Times:
The plan has drawn fierce opposition from the financial industry, which has banded together in a lawsuit challenging the city’s authority. In a new filing late Thursday, the plaintiffs accused the city and Mortgage Resolution Partners of cherry-picking the most valuable loans and forcing their sale at less than market value — so the firm can make a profit.
The effect will be to rob owners of mortgage securities across the country, the opponents contend, including everyday investors whose retirement savings are managed by some of the biggest bond funds in the nation.
“MRP is renting local government power to take money out of the pockets of savers and retirees across the U.S. and line their own pockets,” said a statement from attorney John Ertman of Ropes & Gray, the lead counsel for the banks and bond house seeking to shut down the program before it takes hold and spreads to other cities.
This argument from the banks might have more power, had the banks themselves not used state legislatures to gut the centuries-old title registration system and replace it with the industry-run, unaccountable, and opaque system known as MERS. [From Barry Ritholz comes this description of MERS: "MERS is an abomination, a legal blasphemy that should be destroyed before it unleashes the four horsemen of the apocalypse"]. It’s not a stretch at all to replace a few words from Ertman’s statement and come up with this: “The financial industry rented state government power to take money out of the pockets of cities and counties across the U.S. and line their own pockets.”
Maybe that’s why Ertman released a written statement, rather than stand in front of the cameras and say these words. It would certainly be hard to keep a straight face.
The likely response by Richmond and MRP is fairly straightforward, as I said before:
(1) These overinflated mortgages have caused significant portions of the city to become potentially blighted and pose serious problems to the city if the banks foreclose on them — or even if they merely threaten to foreclose — and the owners of the property move out. [See "Detroit"]
(2) The homeowners have tried repeatedly — without success — to rework the mortgages, both with the banks who service the loans and through various federal programs, but the incentives to the servicer banks are to prolong the process, not to refinance/rework the loan, and so they delay and deny relief, while investors in RMBSs are similarly disinclined to take a haircut on their paper profits.
(3) The City of Richmond, therefore, is left as the agent of last resort, and is taking this action to preserve the city itself.
As the city and MRP said at the end of that LA Times piece, this is designed to “limit further damage to Richmond’s battered neighborhoods. ‘The intent here is to help the neighbors.’”
But PR salvos in court filings aren’t the only pressures the banks are putting on the Richmond city council. They’re also shutting off the city’s bond sales. From the Contra Costa Times:
With legal and financial challenges mounting , momentum is building to scuttle [Richmond's] radical plan to use eminent domain to seize underwater mortgages and refinance them at amounts homeowners can afford.
In August, Wells Fargo and Deutsche Bank filed suit on behalf of investors for a preliminary injunction against Richmond and Mortgage Resolution Partners (MRP), the San Francisco-based investment firm that the city has partnered with to implement the plan. A hearing is scheduled for Sept. 13.
Perhaps more troubling, investors this month steered clear of the city’s highly rated municipal bonds, which it was attempting to sell to refinance a bond issue, saving $4 million. Some think the lack of investor interest was precipitated by the eminent domain decision. The city’s finances are already reeling, thanks to steep reductions in property tax revenues.
Banks are steering the investment clients away from Richmond’s bond sales? No one could have anticipated . . .
But if I were a major investor looking to park some money, I’d worry a lot more about RMBS vehicles stuffed with over-valued mortgages and a lot less about municipal bonds offered by a city that’s trying to take positive steps to cure the imbalance between paper values and actual values. Oh, and also I’d really steer clear of stocks in major banks and investment firms. If Richmond holds firm and continues on this path, they still hold the biggest stick of all: discovery.
That’s why the banks are pushing back so hard, so fast. The last thing they want is for Richmond’s legal team to be able to expose their banking practices to the world in a courtroom. “Here’s how the banks pushed questionable loan terms onto Richmond’s homeowners . . . Here’s how the banks and their poor paperwork practices have screwed up attempts to modify these loans . . . Here’s how the bank’s incentives have worked to delay and deny mortgage modifications . . . Here’s how the banks have consciously worked to fleece the City of Richmond, the County of Contra Costa, and the State of California . . .”
That’s why the banks are pushing back. They’re getting more and more nervous, as that September 13th hearing date approaches. Filings in court and whispers to investment clients in quiet back rooms are both designed to accomplish the same thing: stop this bid by Richmond to save their neighborhoods.
Shorter banksters: “Nice city you’ve got here, Richmond. It’d be a shame if anything were to happen to it . . .”
Photo by Justin Matthew under Creative Commons Attribution 2.0 Generic license.