The city of Richmond, California has triggered a high-stakes legal test for the mortgage-backed securities market. On August 7th, some of the nations' largest banks sued Richmond to stop the city from forcibly purchasing loans on several hundred properties using eminent domain. The suit claims that the forfeiture discount is based on an exaggeration of foreclosure risk. They note that the city is targeting some homeowners with good credit ratings who are paying their mortgages.

Richmond boldly proposed to acquire underwater but performing loans at a price below the market value of the homes. Although this may actually benefit the bondholders, the long-term consequences of the city's actions are pretty profound for California real estate and real estate in general. 

Click here for the complete article by Jacob Gershman in context. 

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