PAUL J. HALL (State Bar No. 66085)

Wells Fargo Bank, National Association et al v. City of Richmond, California et al

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Doc. 50 Att. 1

PAUL J. HALL (State Bar No.66085)

paul.hall@

ISABELLE L. ORD (State Bar No. 198224)

isabelle.ord@

MATTHEW COVINGTON (State Bar No. 154429)

matthew.covington@

DLA PIPER LLP(US)

555 Mission Street, Suite 2400

San Francisco, CA 94105-2933

Tel: 415.836.2500

Fax: 415.836.2501

Attorneys for Amici Curiae

California Bankers Association, American Bankers

Association, California Mortgage Bankers

Association, and California Credit Union League

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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SAN FRANCISCO DIVISION

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WELLS FARGO BANK,NATIONAL

ASSOCIATION, as Trustee, et al.,

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Plaintiffs,

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v.

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CITY OF RICHMOND,CALIFORNIA,a

municipality; and MORTGAGE

RESOLUTION PARTNERS, L.L.C.,

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CASE NO. CV-13-03663-CRB

MEMORANDUM OF LAW AS AMICI

CURIAE OF CALIFORNIA BANKERS

ASSOCIATION,AMERICAN BANKERS

ASSOCIATION,CALIFORNIA

MORTGAGE BANKERS ASSOCIATION,

AND CALIFORNIA CREDIT UNION

LEAGUE IN SUPPORT OF PLAINTIFFS'

MOTION FOR A PRELIMINARY

INJUNCTION

Defendants.

Date:

Time:Judge:

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September 13, 2013

10:00 a.m.

Hon. Charles R. Breyer

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Dockets.

SUMMARY OF ARGUMENTS OF AMICI CURIAE

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The California Bankers Association, American Bankers Association, California Mortgage

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Bankers Association, and California Credit Union League, as amici curiae (the "Amici Curiae),

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respectfully submit this Memorandum of Law to aid the Court in its evaluation of Plaintiffs'

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Motion for Preliminary Injunction and Defendants' Motion to Dismiss. The Amici Curiae are

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trade associations which represent the banking, credit union and mortgage lending industries in

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California and nationally. They offer this brief based on their expertise in residential mortgage

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lending and credit markets, in California and nationally. They address complementary, but

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additional, points to those argued in Plaintiffs' Motion for Preliminary Injunction.1

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This action presents a clearly defined case or controversy between the parties, and the

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Amici Curiae support Plaintiffs' position on their Motion for Preliminary Injunction and in

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opposition to Defendants' Motion to Dismiss. If prompt declaratory and injunctive relief were

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not granted by this Court, the resulting uncertainty on fundamental constitutional issues would

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cause substantial, immediate and irreparable harm to the public interest, including to the

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California and national financial system on which residential mortgage lending is based. These

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harms would affect lenders, investors in residential mortgage-backed securities("RMBS"),

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prospective borrowers who will face material restrictions on and increased costs of credit, and the

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very homeowners who are targeted by the City of Richmond's Home Preservation Program (the

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"Taking Program"). History demonstrates the deleterious effects of legal uncertainty on

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mortgage lending, California's economy, and the national credit markets. In addition to

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preventing irreparable harm to the Plaintiff trusts, a preliminary injunction would be in the public

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interest to prevent a massive credit and real estate market disruption while the legality ofthe

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Taking Program is being determined by the courts.

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The Amici Curiae are non-profit trade associations. None ofthem are more than 10% owned by

any public corporation. The Plaintiffs in this case are members of one or more ofthe Amici

Curiae, but only in the capacity of dues-paying members, with no special ownership interest nor

dues-paying beyond that of other members. No party to this case, nor its counsel, authored this

brief in whole or in part, nor contributed money intended to fund the preparation or submission of

this brief. No person contributed money intended to fund the preparation or submission of this

brief.

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(CASE NO. CV-13-03663-CRB)

Federal Housing Finance Agency Regulated Entities May Not Buy New Loans:

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The Federal Housing Finance Agency("FHFA")identified the important issues posed by

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the threatened Taking Program and on August 9, 2012 published a request for public comments.

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Federal Register, Vol. 77, No. 154, p. 47652, Request for Judicial Notice ("RJN"), Ex. 1. After

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consideration of public comments, on August 7, 2013,the FHFA published its General Counsel

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Memorandum (RJN,Ex. 2), which found that:

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"there is a rational basis to conclude that the use of eminent domain by localities

to restructure loans for borrowers that are 'underwater' on their mortgages

presents a clear threat to the safe and sound operations of Fannie Mae, Freddie

Mac and the Federal Home Loan Banks as provided in federal law, would run

contrary to the goals set forth by Congress for the operation of conservatorships

by FHFA and presents a direct relationship to FHFA's responsibility for

overseeing entities that deal in 'federally related mortgage loan[s]' as defined at

12 USC 2602." Id., p. 7.

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The FHFA General Counsel further found that mortgages that were the product oftakings and

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refinancing under the Taking Program would be risky and subject to a potential decision that the

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FHFA's regulated entities should be ordered not to buy them. Id. at pp. 6-7 and n.6, citing

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County ofSonoma v. Federal Housing Finance Agency, 710 F.3d 987(9th Cir. 2013).

Title Insurance Companies May Not Insure New Loans:

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2.

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If the Taking Program were implemented, and if the constitutional issues were not first

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decided by this Court, then the uncertainty concerning the rights of the RMBS owners of the

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existing mortgage loans (the "First Loans"), as compared to the rights of successor owners of new

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refinance loans under the Taking Program (the "New Loans"), would cause title insurers either to

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not write policies of title insurance for the New Loans at all, or to except from coverage the issues

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raised in this action. New private lenders almost certainly would not make the New Loans

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without title insurance that covered the issues raised by this action. As a result, the City of

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Richmond may be stuck as the owner of a portfolio of First Loans seized by eminent domain that

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cannot be refinanced and which the City cannot afford to own on an ongoing basis. Further,

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homeowners who participated in the Taking Program could find themselves with unusable title

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policies (if any), and/or a cloud on title that renders their homes impossible to sell.

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Principal Reduction is Debt Forgiveness to Homeowners¡ªA Taxable Event:

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Homeowners who receive a principal reduction under the Taking Program will end up

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with large state and/or federal tax bills for the debt forgiven, taxed at ordinary income rates.

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There is currently no California exception to taxation for mortgage debt forgiveness in 2013, and

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no California or federal exception for 2014. Homeowners will not be able to afford large tax bills

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where, as here, no cash-out for homeowners will be generated in the transactions, and those tax

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bills could independently drive them into foreclosure. This risk is not satisfactorily disclosed in

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the Taking Program proposal of Mortgage Resolution Partners, LLP("MRP"), which simply

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suggests that potentially affected homeowners "consult their own tax advisors"¡ªan illusory

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admonition for people who supposedly need mortgage principal reduction relief. (MRP FAQs,

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Declaration of John C. Ertman ("Ertman Decl.")(Dkt. 9), Ex. D, p. 8)("MRP FAQ").

Increased Costs of Credit and Decreased Tax Revenue for the City:

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4.

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The Taking Program, if implemented, would flood the Richmond housing market with

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about 670 new,low market comparable transactions based on revaluation of the homes through

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eminent domain. This will skew market comparables and appraisal values in the City, causing (a)

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an immediate downward valuation of the homes of targeted homeowners and all their neighbors,

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and (b) a flood of requests for downward property tax reassessments. MRP expressly urges home

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owners to seek this "temporary" property tax reassessment. (MRP Presentation, Ertman Decl.

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(Dkt. 9), Ex. C, p. 6)("MRP Presentation"). The result will be a diminution of the tax base ofthe

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City, directly in conflict with the stated goal of raising the tax base through the Taking Program.

The Consequences of the Taking Program Are Not Speculative or "Crying Wolf':

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History shows the Taking Program would result in decreased availability and increased

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cost of residential lending credit, and illiquidity in the real estate market. Wellenkamp v. Bank of

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America, 21 Cal. 3d 943 (1978), barred enforcement of due-on-sale clauses in residential loans in

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California, thus changing the contracts between borrowers and lenders and adversely altering the

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real estate market. The result was contraction of and higher prices for home loan credit in

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California and resulting real estate illiquidity until the decision was overruled by federal statute,

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12 U.S.C. ¡ì 1701'-3, and Fidelity Fed. Say. & Lte Assoc. v. de la Cuesta, 458 U.S. 141 (1982).

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(CASE NO. CV-13-03663-CRB)

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THE FHFA MAY RESTRICT FEDERALLY BACKED LOAN PURCHASES

WHILE UNCERTAINTY REMAINS

As advocated by the Defendants, the Taking Program will only provide alleged benefits to

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homeowners if the seized loans can be refinanced with lower principal amounts. Only upon

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refinancing, and the creation of a New Loan and mortgage, will the seized loans be extinguished

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and the homeowner's debt obligation reduced. However,until this Court and appellate courts

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have decided the Plaintiffs' constitutional challenges to the Taking Program,refinancing will

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likely be impossible due to legal uncertainty concerning the validity of the Taking Program.

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The FHFA,the conservator of Freddie Mac, Fannie Mae and the Federal Home Loan

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Banks, has conducted its own analysis ofthe use of eminent domain to restructure mortgages and

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has raised significant concerns about the constitutional validity and economic viability of such

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programs. Therefore, the FHFA already has warned that it may order its conservatees (the largest

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purchasers of residential mortgages) not to purchase mortgages that are the product of an eminent

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domain taking and refinancing under the Taking Program. The FHFA warned that it may direct

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the regulated entities to limit, restrict or cease business activities within the jurisdiction of any

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state or local authority employing eminent domain to restructure mortgage loan contracts.

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(August 7, 2013 FHFA General Counsel Memorandum, p.6, n.6, RJN,Ex. 2.)

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Following identification of the issues and extensive public comment regarding the use of

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eminent domain to seize mortgage loans, the FHFA General Counsel concluded that "adverse

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reactions to such a program could dramatically alter the business Model for lending. If investors

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and lenders see increased uncertainty, two routine results would be anticipated¡ª limitation on

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lending and on investing in certain markets and higher costs to address uncertainties." Id. at p. 5.

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In addition to these negative market effects, the General Counsel also raised concerns about the

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legality of such a program and the consequences of such questionable legality:

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"[E]minent domain for restructuring mortgages could run contrary to the

conservatorships which prohibit states from interfering with the operation of

FHFA.6 Pulling performing loans out of PLS by a state or state-authorized body

could remove FHFA discretion to maintain the value of PLS and not to have

investments under its control affected by state action." (Id., p. 5.)

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(CASE NO. CV-13-03663-CRB)

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