Sidetrack: I put $50K into a townhouse in 2007 (my mistake!). I lost it all when the real estate market flopped. I walked away from the property because I wasn't willing to work for several years just to pay the principle down.
End result: No matter what, the real estate lost value. Either write it down now, or enjoy the pain as you write it off later (ie "extend and pretend": http://www.americanbanker.com/bankthink/megabanks-extend-and...).
What's that? Default judgement? Oh no. Bankruptcy. I still get to keep $1MM plus in retirement accounts, and I just can't buy another house for ~7 years. How horrible.
Mortgages are not derivatives, they are debts. Tracing the owner of a mortgage should not be challenging. In the event that it is, that becomes the mortgage servicer's fault, an issue between the investor and the servicer.
Courts are likely to strike this down. This will trash Richmond's public balance sheet. If courts allow this one would eventually expect private sector credit availability, to anyone in a low income neighbourhood, to dramatically re-price or freeze. It could also trigger a national housing credit, and price, pull-back.
Ironically either outcome will further impair Richmond property values, pushing more borrowers underwater and the city's tax income lower.