Editor's note: A comment has been added by John Vlahoplus, the chief strategy officer at Mortgage Resolution Partners.
A controversial plan for local governments to invoke eminent domain to seize underwater home loans—the target of a major new lawsuit this week—is in large part the work of a Cornell Law professor and a former Sullivan & Cromwell associate who became friends when they were Rhodes Scholars at Oxford.
On Wednesday, acting on behalf a coalition of bond investors, Wells Fargo & Co. and Deutsche Bank took aim at efforts by Richmond, Calif., to use the untested strategy to seize home loans held by hundreds of securitization trusts. Home owners would benefit by having the loans refinanced at a lower principal amount. Represented by Ropes & Gray, the trustee banks sued the city of Richmond, claiming that its plan—under which loans would be bought at a discount—amounts to an unconstitutional taking that could cost them as much as $200 million. The plaintiffs warn that if other municipalities follow suit, the banking industry will be forced to charge more for loans, devastating the housing market.
The banks also sued a San Francisco firm called Mortgage Resolution Partners, which has a contract with Richmond to refinance the seized loans with the aim of making a profit, according to the complaint. The plaintiffs maintain that MRP has contracts with "numerous municipalities" across the country to implement similar plans. And while Richmond hasn't yet seized any loans, the plaintiffs state that the city has come closer than any other. (Mother Jones profiled MRP and its founder, venture capitalist Steven Gluckstern, in January.)
In an interview, Cornell Professor Robert Hockett said he developed the eminent domain strategy in Richmond before the mortgage crisis peaked in 2008, but it's taken years to find communities willing to take the plunge. He presented a version of the plan to the Obama campaign in 2008, he said, but they didn't bite. He found a receptive ear when he later turned to his Oxford friend John Vlahoplus, a former Sullivan & Cromwell associate who worked at Zurich Financial Services Group and Credit Suisse, and who is now chief strategy officer at MRP. The investment firm would make money by getting seized loans refinanced for more than the price paid under the eminent domain taking. Hockett maintains that the banks would be paid a fair value for the loans, because restrictions imposed by the securitization process have lowered their values.
Hockett has served as an unpaid adviser to MRP and to other firms, including some non-profits, that are considering participating in the eminent domain plan. (He did note that he was paid once by MRP for a legal memo on eminent domain issues.) He doesn't have any investment interest in MRP or any of these other groups, he said. "This is something I undertook pro bono," Hockett said. "I want to see our [mortgage] crisis end." He added that he thinks the banks miscalculated by filing their lawsuit too soon, before any eminent domain powers had been asserted. "They're asking for declaratory relief," he said. "The court will probably throw this out. There's no reason to decide this now."
