Foreclosure Home News and Opinion Eminent Domain: U.S. Warns Against Seizing Mortgages

Eminent Domain: U.S. Warns Against Seizing Mortgages

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The nation’s leading housing finance regulator warned cities and counties last week that using eminent domain to seize underwater mortgages could be unconstitutional.

The Federal Housing Finance Agency, which regulates mortgage giants Fannie Mae and Freddie Mac, issued a statement that was posted on the agency’s website threatening to curtail lending in cities that resort to eminent domain.

“There is a rational basis to conclude that the use of eminent domain by localities to restructure loans for borrowers that are "underwater" on their mortgages presents a clear threat to the safe and sound operations of Fannie  Mae, Freddie Mac and the Federal Home Loan Banks as provided in federal law,” wrote Alfred M. Pollard, the general counsel at FHFA.

The small Bay Area city of Richmond, Calif., where half of all mortgages remain  underwater, announced last month that it would seize mortgages from investors and write down the loan balances to help delinquent borrowers at risk of foreclosure. This week it became the first city in America to say it intends to seize  private mortgages whose value is higher than the homes they helped to buy. The city wants to force mortgage companies to sell loans on 624 properties and refinance the loans so the underwater borrowers can get a principal reduction.

This is a thorny issue because in municipalities like Richmond, the mortgage “companies” and “lenders” aren’t banks, but mortgage-backed security investors. On Wednesday, a group of mortgage investors and private lenders filed a lawsuit against the city of Richmond to block the property seizure as unconstitutional.

The mortgage bond holders may have a strong case. The Fifth Amendment of the U.S. Constitution, which is part of the Bill of Rights, protects property owners against abuse of government authority, claiming that eminent domain must be for “public use,” but in this case the property seizure would benefit a private company, Mortgage Resolution Partners, which stands to profit from the program.

The FHFA statement comes on the heels of the Richmond lawsuit, and a day after Fannie Mae and Freddie Mac joined investors authorizing a lawsuit to stop Richmond from seizing mortgage.

“In response to an eminent domain action to restructure mortgage loans, FHFA may take any of the following steps: initiate legal challenges to any local or state action that sanctions the use of eminent domain to restructure mortgage loan contracts that affect FHFA’s regulated entities; act by order or by regulation to direct the regulated entities to limit, restrict or cease business activities within the jurisdiction of any state or local authority employing eminent domain to restructure mortgage loan contracts; or take such other actions as may be appropriate to respond to market uncertainty or increased costs created by any movement to put in place  such programs.”

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