WASHINGTON (8/1/13)--Legislation is needed to prohibit the Federal Housing Administration (FHA) from insuring residential mortgages seized through eminent domain because of market developments in that arena threaten to freeze the return of private capital to housing markets, the Credit Union National Association said in a joint letter sent Wednesday to encourage members of the U.S. Congress to support such legislation.
The insurance prohibition has been offered as an amendment to the Transportation, Housing and Urban Development, and Related Agencies Appropriations Act for Fiscal Year 2014 (H.R. 2610).
The amendment has become necessary because communities across the country are considering a plan developed by a vulture fund that would play on eminent domain powers, CUNA wrote. Vulture fund is a term used to refer to a private equity or hedge fund that invests in debt considered to be very weak.
The plan would use a municipality's eminent domain power to acquire performing-but-underwater mortgages held in private-label, mortgage-backed securities and then insure the new loans through the taxpayer-backed FHA, the CUNA letter explained. It noted that Richmond, Calif. is reportedly prepared to become the first city in the nation to start seizing loans in this unprecedented manner.
Such actions could freeze the return of private capital to housing markets.
This proposed use of eminent domain also raises very serious legal and constitutional issues, and would have lasting negative effects on existing and future homeowners and Main Street investors, the letter added.
"While we support a broad range of programs to assist struggling homeowners and the communities in which they reside, we are firm in our belief 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 co-signors said.
The letter was signed by the American Bankers Association, American Council of Life Insurers, American Land Title Association, American Securitization Forum, Association of Mortgage Investors, Financial Services Roundtable, Housing Policy Council, Independent Community Bankers of America, Investment Company Institute, Mortgage Bankers Association, National Association of Federal Credit Unions, National Association of Home Builders, National Association of Realtors and the Securities Industry and Financial Markets Association.