Richmond, CA's plan to take the lead in seizing troubled mortgages through eminent domain ignites a political firestorm and triggers legal roadblocks that could put the concept on hold. A major obstacle is a position articulated by Alfred Pollard, the head lawyer of the Federal Housing Finance Agency.
Pollard, saying he speaks for himself and not the FHFA, cautions the regulator of Fannie Mae and Freddie Mac to step back on allowing the GSEs to insure any mortgage seized under the property-taking concept designed by San Francisco-based Mortgage Resolution Partners (MRP). The FHFA memo emerges a week after the filing of a lawsuit by a group of investors seeking to halt Richmond's effort.
MRP's plan to use eminent domain calls for local governments to buy mortgages at the fair market value of their corresponding homes. The government would then help the "underwater" homeowners refinance their mortgages, relieving them of paying on a loan far exceeding the current value of their homes.
There is little risk for MRP, which enters the transaction after the city seizes a mortgage and writes down the principal to conform to the current value of the home. Acting as a middleman, MRP negotiates with new investors to buy the loan and takes a fee for the effort.
The loans are performing, non-delinquent ones -- i.e., homeowners are current with payments -- lessening the risk they will default at some future point. Loans already headed for foreclosure are not considered.
Pollard's memo expresses the FHFA's view that using eminent domain to seize underwater mortgages "presents a clear threat to the safe and sound operations of Fannie Mae, Freddie Mac and the Federal Home Loan Banks."
The memo also indicates the FHFA has several options to undertake if mortgages begin to be seized through eminent domain, including the initiation of legal challenges and directing the GSEs to "limit, restrict or cease business activities within the jurisdiction of any state or local authority employing eminent domain to restructure mortgage loan contracts."
HUD has been mum on whether the Federal Housing Administration would insure loans refinancing seized mortgages. The federal government now backs about 90% of the mortgage loans; its refusal to insure loans refinanced through eminent domain would leave Richmond with the responsibility to back the loans.
Richmond has already notified 624 homeowners, offering to buy their loans. Those offers would need to be refused before the city could follow through with its vow to invoke eminent domain powers in order to force the sale of the non-delinquent loans so the homeowners could get their debt balances reduced to comport with the current actual values of their properties.
- For more on this and other issues important to the U.S. housing sector, get a sample of this week's edition of Housing Affairs Letter.