City's Plan to Seize Mortgages Could Lead to Court Fights, Attorneys Say

Lawyers are gearing up to challenge a Northern California city's controversial plan to seize underwater mortgages through eminent domain, likely putting contentious court battles on the horizon. Attorneys disagree over the constitutional right of municipalities to wield the legal tool in such a manner, but they said the program puts the city at risk for litigation while also potentially causing significant financial losses for homeowners. K. Erik "Rick" Friess, a partner at Allen Matkins Leck Gamble Mallory & Natsis LLP in Orange County, said he expects lenders to vigorously oppose condemnation proceedings through litigation by arguing it's not a valid exercise of eminent domain. "If you're the lender," Freiss said, "why wouldn't you be the test case if it's going to affect millions of dollars worth of loans?" He added that homeowners who refinanced their original mortgage might end up losing money if they participate in the program because lenders would force them to pay the difference between the loan's market rate and the city's seizure price.