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 in a Nov. 27 joint letter to the secretaries of HUD and the Treasury, four senators -- Pat Toomey (R-Pa.), Mark Begich (D-Alaska), John Boozman (R-Ark.) and Heidi Heitkamp (D-N.D.) – warned that the use of eminent domain to seize underwater mortgages could harm the market. The senators asked HUD Secretary Shaun Donovan to prohibit the Federal Housing Administration from insuring mortgages seized under eminent domain.
“We are concerned that illegitimately using eminent domain in this manner will scare off private capital, dry up new mortgage credit, and harm investors and taxpayers,” the senators wrote. “…Eminent domain may be a local matter, but in the context of seizing mortgages, its use would have national consequences.”
The plan has also drawn fire from industry groups and government regulators. Mortgage bond trustees including Wells Fargo and Deutsche Bank sued the city over the plan, questioning its constitutionality. That suit was dismissed. The Federal Housing Finance Administration 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.”
The senators worried that executing the eminent domain scheme could cause investors to shy away from the mortgage market.
“These local decisions undermine the broad goals, shared by many in Congress and within the Obama administration, of stabilizing our nation’s housing markets and drawing more private capital into the housing finance system,” they wrote. “Furthermore, it would be immoral to seize these private investments, held by investors such as pension funds, in order to generate a profit for municipalities and their investment partners.
“…Action is needed now to provide certainty to the housing market and protection to taxpayers,” they added. “While we are prepared to pursue a legislative solution, we ask that HUD use its existing authority to prohibit FHA
from insuring mortgages on any affected properties.”
A group of U.S. senators has asked the Department of Housing and Urban Development to use its authority to stall the plans of some cities to use eminent domain to seize underwater mortgages.