FHFA to Cities: Don't Abuse Eminent Domain

August 12, 2013

The Federal Housing Finance Agency is the latest agency to step in and threaten lawsuits to try to stop municipalities from using eminent domain to purchase underwater mortgages. The agency says they have “serious concerns” about any municipality that adopts such a plan, and they will consider legal action against any city that does. 

The agency’s announcement follows shortly after a group of the nation’s largest bondholders filed a lawsuit against the city of Richmond, Calif., which is trying to move forward with using eminent domain to seize mortgages. Fannie Mae and Freddie Mac, which are regulated by FHFA, are among the bondholders involved in the lawsuit. The lawsuit calls the use of eminent domain to seize mortgages “unconstitutional” and argues that the loans aren’t being seized for a valid public purpose. 

City officials in Richmond say the plan can reduce foreclosures in the city and help preserve property values. They have recently sent letters to mortgage companies, trying to purchase loans on 624 properties. If investors refuse to sell the loans to them, they’ve threatened to force a sale by using their eminent domain powers. 

The plan is to seize underwater mortgages, reduce the loan balances, and then refinance the loans into a government-backed program. The idea is to keep home owners in their home, city officials argue. However, investors argue that such a move would degrade the value of their investments.

FHFA says it would consider additional lawsuits for any city that approves a program using eminent domain to seize mortgages. It would also consider taking action by  limiting mortgage giants Fannie Mae and Freddie Mac’s ability to purchase loans in those areas. FHFA says using eminent domain in the mortgage market “presents a clear threat to the safe and sound operations” of Fannie Mae and Freddie Mac. 

Source: “City Sued Over Its Plan to Aid Homeowners Through Eminent Domain,” Reuters (Aug. 8, 2013) and “Fannie, Freddie Regulator Weighs Action on Eminent Domain,” The Wall Street Journal (Aug. 8, 2013)

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