Earlier this year, the city of Richmond, Calif., began exploring a plan in which the city, in partnership with the private firm Mortgage Resolution Partners, would buy underwater mortgages, seizing the properties through eminent domain should the note-holders refuse to sell. The city would then refinance the mortgages at terms easier for the homeowners to meet. Other municipalities have taken notice of the plan; the idea has been or is being considered in Chicago, Baltimore, Newark, N.J., and other cities throughout the country.
But the controversial plan has raised the ire of both industry groups and regulators. The FHFA said it would instruct Fannie Mae and Freddie Mac not to guarantee loans in municipalities that used the plan, citing concerns that “such programs could negatively affect the extension of credit to borrowers seeking to become homeowners and on investors that support the housing market.”
ACLU’s suit against the FHFA seeks information on how the agency decided to take that position and the role big banks might have played in influencing the decision, according to a report in the Credit Union Times.
“The FHFA has taken an aggressive stance on this issue in a way that has harmed minority communities. The public deserves to know why,” said ACLU attorney Linda Lye.
The ACLU lawsuit said it made no sense for the FHFA to issue a directive against guaranteeing loans in municipalities that used the eminent domain plan, since all the cities considering the plan have made it clear they would not use eminent domain to seize mortgages held by Fannie Mae or Freddie Mac. Rather, the plan would be aimed at loans packaged into private-label securities not sold on FHFA–regulated markets, the Times reported.
“By definition, the loans that the government sponsored entities, supervised by the FHFA, guarantee and securitize are packaged into agency mortgage-backed securities, and are therefore not subject to seizure under the eminent domain programs under discussion,” the ACLU said in the lawsuit.
The FHFA has not commented on the case.
The American Civil Liberties Union is suing the Federal Housing Finance Agency over the FHFA’s position on the use of eminent domain to reduce the mortgage principal for underwater homeowners.