The independent regulator over Fannie Mae and Freddie Mac on Thursday made it clear that the mortgage-financing entities would consider legal action against any state or city if it were to exercise “eminent domain” authority to restructure underwater mortgages.
The Federal Housing Finance Agency said in a statement that it “continues to have serious concerns on the use of eminent domain to restructure existing financial contracts and has determined such use presents a clear threat to the safe and sound operations of Fannie Mae, Freddie Mac and the Federal Home Loan Banks.”
Fannie and Freddie own a majority of U.S. mortgages and they are big buyers of private-label, mortgage-backed securities. The entities are taxpayer-subsidized, but have achieved profitability over recent quarters after seeking nearly $190 billion in bailout funds since the financial crisis.
Fannie and Freddie issued the statement as mortgage bond investors filed a lawsuit against the city of Richmond, California over its recent action to seize mortgage assets by using its power of eminent domain.
Eminent domain gives government the right to take private property for public use in return for fair compensation. But that authority has little or no legal precedent when it comes to seizing “underwater” mortgages as a foreclosure-prevention strategy.
Richmond is in partnership with Mortgage Resolution Partners, a major advocate of the proposal, which would buy mortgages at a discount to current property value and then refinance them at lower rates.
A lawsuit was filed Wednesday in federal court in Northern California by three mortgage-bond trustees. They seek a preliminary injunction against Richmond and Mortgage Resolution Partners. The city’s strategy could cause investors losses of potentially $200 million or more if Richmond moves forward with eminent domain, the lawsuit alleges.
Richmond’s program targets borrowers who currently owe more on their loans than the value of their properties. They would see their monthly payment come down sharply after the refinancing is completed. Other communities are considering the tactic to stem the flow of foreclosures and the blight of abandoned homes in the hardest-hit neighborhoods.
Advocates of eminent domain say such a program would do more to prevent foreclosures than programs partly sponsored by the federal government, such as the struggling Home Affordable Modification Program, or HAMP, which has come under fire by consumer advocates and a congressional watchdog for its high re-default rates and other deficiencies.
Nonetheless, the FHFA, the regulator over Fannie and Freddie, said that it would take any of the following steps to combat eminent domain as applied to mortgages:
- 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.