Eminent Domain- Mortgages- In San Bernardino County

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FHFA Steps Up Battle over Eminent Domain

BY: Sorohan, Mike
The Federal Housing Finance Agency upped the ante in a controversial debate over a California county’s proposed use of eminent domain, expressing “significant concerns” over its use to revise existing financial contracts.

In a notice (http://www.ofr.gov/OFRUpload/OFRData/2012-19566_PI.pdf) sent to the Federal Register, FHFA warned that it might take action “to avoid a risk to safe and sound operations at its regulated entities and to avoid taxpayer expense.” Additionally, FHFA expressed concerns that use of eminent domain “could negatively affect the extension of credit to borrowers seeking to become homeowners and on investors that support the housing market.”

San Bernardino County, Calif., and two municipalities within the county (Fontana and Ontario) are exploring efforts to invoke eminent domain to seize mortgages for homeowners with negative equity. The County Board of Supervisors recently agreed to form a Joint Powers Authority with those cities to explore a Homeownership Protection Program. It would give the county the ability to acquire mortgages with negative equity--also known as “underwater” mortgages--and restructure them, using private funds from investors. The plan was first proposed to the county by Mortgage Resolution Partners, San Francisco, a venture capital firm.

The Mortgage Bankers Association and other industry trade groups have expressed strong objections to the proposal, saying if eminent domain were used to seize loans and force losses on mortgage investors, it would set a dangerous precedent that could dry up credit for mortgages in San Bernardino County.

“Investors in mortgage-backed securities would suffer immediate losses and likely be reluctant to provide future funding to borrowers in these areas,” said MBA President and CEO David Stevens. “Some loans could be excluded from securitizations and some portfolio lenders will likely withdraw from these markets, making mortgages more expensive for all borrowers. This would also further depress housing values by restricting the flow of credit to homebuyers, stopping the housing recovery in its tracks.”

FHFA, the conservator of government-sponsored enterprises Fannie Mae, Freddie Mac and the Federal Home Loan Banks, warned that use of eminent domain to revise existing financial contracts and alteration of the value of GSE or FHLBank securities holdings.

“In the case of the Enterprises, resulting losses from such a program would represent a cost ultimately borne by taxpayers,” FHFA said. “At the same time, FHFA has significant concerns with programs that could undermine and have a chilling effect on the extension of credit to borrowers seeking to become homeowners and on investors that support the housing market.”

FHFA said the eminent domain proposal raises numerous legal questions, including the constitutionality of such use; application of federal and state consumer protection laws; effects on holders of existing securities; impact on millions of negotiated and performing mortgage contracts; the role of courts in administering or overseeing such a program, including available judicial resources; fees and costs attendant to such programs; and “critical issues” surrounding the valuation by local governments of complex contractual arrangements that are traded in national and international markets.

FHFA opened a comment period, through Sept. 7, for further input on the topic. Communications may be addressed to FHFA Office of General Counsel, 400 Seventh Street SW., Eighth Floor, Washington, DC 20024, or emailed to FHFA OGC at eminentdomainOGC@fhfa.gov.