The city of Richmond recently asked financial institutions to sell 624 troubled mortgages — and threatened to seize them through eminent domain. Now the city has its answer: We can’t help you.
The city aims to provide its residents mortgage relief by buying the loans at a deep discount, then getting them refinanced at amounts lower than the current value of the home. But the loans aren’t for sale, according to banks that provide customer service on the loans and watch over the trusts where the loans were pooled to back mortgage bonds.
Proponents of the Richmond plan said a letter to the city from David V. Gorsche, assistant general counsel at Wells Fargo & Co., was typical of the response.
The letter said that the San Francisco bank, “in its role as either servicer of the loans or as trustee, does not have the contractual authority to sell the loans.”
What’s more, it went on, the bank “is not aware of any other party having the contractual authority to sell the loans or consider your offer.”
The loans at issue had been pooled with other mortgages to back bonds sold to investors without guarantees from government-sponsored entities such as Fannie Mae and Freddie Mac. These private-label securities, as they are called, have prompted bitter disputes in the long-running mortgage debacle.
Chapman University law professor Kurt Eggert, a scholar of mortgage securities, said the private securitizations have created such complexity and conflicts of interest that servicers can’t or won’t take actions that would benefit borrowers and investors alike.
“Isn’t that amazing — to have property that can’t be bought or sold,” he said of Gorsche’s letter. “It’s antithetical to the concept of what property is.”
Steven Gluckstern, the head of a San Francisco investor group promoting the plan to have cities buy troubled mortgages, said loans that are impossible to sell underscore his belief that the private-label securitizations are “Frankenstein contracts or suicide pacts.”
Adopting Gluckstern’s strategy, Richmond city officials have said they would use eminent domain — the civic power to compel the sale of property to be used for the public good — to seize the mortgages if the banks cannot or will not sell them.
The plan has been challenged in a federal lawsuit by banks, including Wells Fargo, and by a group of prominent bond investors. Officials at Fannie Mae and Freddie Mac, which had invested in private-label securities, also have threatened to sue. And Fannie and Freddie’s federal regulator said it was considering barring the finance companies from purchasing home loans in cities that adopt the plan.
Gayle McLaughlin, Richmond’s mayor, has said previously that the city would move ahead despite the litigation and threats. She couldn’t be reached on Thursday, part of which she spent in an unsuccessful effort to obtain a meeting with John Stumpf, Wells Fargo’s chief executive.
McLaughlin joined several dozen protesters at Wells Fargo’s headquarters in downtown San Francisco, where the bank said it locked the doors to a first-floor branch “to protect the safety of our customers and team members.”
“Wells Fargo representatives routinely meet with local elected officials, and have met with Mayor McLaughlin in the past regarding community concerns,” the bank said in a statement. “Representatives are open to doing so again in the future.”
The Securities Industry and Financial Markets Assn., a lobbying group for securities firms, banks and asset managers, expressed concern that investors would be shortchanged by the eminent domain scheme.
Investors “will become reluctant to put their capital at risk in communities that take such shortsighted actions,” hurting loan availability and home prices, said a statement from the group’s managing director, Chris Killian.