WASHINGTON (8/8/13)--The Federal Housing Finance Agency (FHFA) and government-owned mortgage financer Freddie Mac are considering legal action against a city in California that is threatening to use eminent domain to seize underwater mortgages from private trusts.
Richmond, Calif., recently sent notice to holders of more than 620 mortgages, asking them to sell their loans to the city for 80% of the homes' fair value. The city then would write them down, and help the homeowners refinance their loans, according to Reuters and Politco (Aug. 7). If the offers aren't accepted, the city said it would use eminent domain to seize the loans at a value determined by a court.
Freddie Mac General Counsel William McDavid told reporters in a conference call that the seizures would amount to loan sales under pressure. "We would consider taking legal action," he was reported as saying.
The Credit Union National Association, in a joint letter July 31 with other associations and organizations, urged Congress to support an amendment that would take steps to prohibit the Federal Housing Administration (FHA) from insuring residential mortgages that have been seized through eminent domain (News Now Aug. 1). The amendment would be a provision of the Transportation, Housing and Urban Development, and Related Agencies Appropriations Act for Fiscal Year 2014 (H.R. 2610).
The city's plan and other developments would threaten to freeze the return of private capital to housing markets, the letter. It noted a plan developed by a vulture fund--a private equity or hedge fund that invests in weak debt--would use a city's eminent domain power to acquire performing-but-underwater mortgages held in private label, mortgage-backed securities and then insure the new loans through FHA. Richmond was specifically mentioned in the letter as being prepared to become the first city in the U.S. to seize loans in this unprecedented manner.
CUNA supports a broad range of programs to assist struggling homeowners and their communities, but believes that "using the power of eminent domain in this manner would harm our nation's housing markets and the very communities it is intended to help," the letter said.
The letter was also signed by 14 other trade groups.