FHFA Weighs in on Eminent Domain Proposals

The Federal Housing Finance Agency (FHFA)rnwill post a notice in the FederalrnRegister on Thursday announcing that it was open to input from any personsrnwith views on the subject of eminent domain as a mechanism to restructurernperforming loans.  The agency therebyrnentered the growing controversy around the subject. </p

As background, in June the Board ofrnSupervisors in San Bernardino County California announced a HomeownerrnProtection Program in which they proposed to use their power of eminent domainrnto take underwater mortgages from lenders and restructure them for borrowers atrnthe fair market price.  Officials inrnBerkeley, California and Chicago subsequently passed similar measures.  </p

The San Bernardino action immediatelyrntriggered a response from SIFMA, the trade organization representing thernsecurities industry, protesting the proposed actions and indicating that suchrnan action would trigger litigation against the local governments and ultimatelyrnbackfire on the communities’ borrowers, limiting credit in the future.  In response to those comments, CaliforniarnLieutenant Governor Gavin Newsom politely told SIMFA to shut up.</p

FHFA has now expressed its concern overrnthe proposals.  Citing its role asrnconservator of Freddie Mac and Fannie Mae (the GSEs), FHFA said its obligationrnis to preserve and conserve the GSE’s assets and to minimize costs torntaxpayers.  These entities purchase arnlarge portion of the mortgages originated in the U.S. the notice says, and theyrnhold private label mortgage backed securities containing pools of non-GSErnloans.  The Banks also have largernholdings of such securities and accept collateral that consists of mortgages ofrnmember financial firms pledged in exchange for advances of funds.   </p

The notice, signed by FHFA COO RichardrnHornsby says the agency has significant concerns about the use of eminentrndomains to revise existing financial contracts and the alternation of the valuernof GSE or bank securities holdings.  Inrnthe case of the GSEs resulting losses would ultimately be borne byrntaxpayers.  FHFA also expressed concernrnthat the programs could undermine and “have a chilling effect” on the extensionrnof credit by investors that support the housing market.</p

The agency said it has determined thatrnit might need to take action both as conservator of the GSEs and regulator forrnbanks to avoid a risk to safe and sound operations and avoid taxpayer expense.  The proposed use of eminent domain raisesrnissues about the constitutionality of such an action, the application of federalrnand state consumer protection laws, the effects on holders of existingrnsecurities and on millions of negotiated and performing mortgage contracts.  There are also issues regarding the role ofrnthe courts in administering or overseeing such a program and, in particular,rncritical issues surrounding the valuation by local governments (as is typicalrnin eminent domain proceedings) of complex contractual arrangements that arerntraded in national and international markets.</p

Anyone wishing to comment can do sornthrough the FHFA Office of General Counsel on or before September 7.

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