FHFA Calls Eminent Domain ‘Threat’ to GSEs, May Consider Legal Action

As local governments consider the use of eminent domain to seize underwater mortgages, they may have to deal with the ""Federal Housing Finance Agency"":http://www.fhfa.gov/ (FHFA) before moving forward with the plan.

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In a statement Thursday, FHFA stated it may ""initiate legal challenges"" to local or state actions that authorize the use of eminent domain to restructure mortgage contracts impacting Fannie Mae and Freddie Mac.

Another action the GSEs' regulator might take is limit or stop business activity in jurisdictions that authorize the use of eminent domain to restructure mortgages.

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According to the statement, the conclusion was based on the law and input received. In an ""analysis"":http://www.fhfa.gov/webfiles/25418/GCMemorandumEminentDomain.pdf of the input, Alfred M. Pollard, FHFA general counsel, wrote ""there is rational basis to conclude that the use of eminent domain by localities to restructure loans for borrowers that are 'underwater' on their mortgages presents a clear threat to the safe and sound operations of Fannie Mae, Freddie Mac and the Federal Home Loan Banks.""

Pollard also stated the use of eminent domain ""would run contrary to the goals set forth by Congress for the operation of conservatorships by FHFA.""

The statement follows ""reports"":http://blogs.wsj.com/developments/2013/08/07/freddie-mac-considers-legal-action-to-block-eminent-domain-plan/ that Freddie Mac might take legal action to stop Richmond, California, from using eminent domain to seize underwater mortgages. Recently, officials in the city ""approved"":http://dsnews.comarticles/industry-denounces-city-for-threatening-banks-with-eminent-domain-2013-07-31 adoption of the controversial approach, but the city was hit with a lawsuit Wednesday from an institutional investor group, according to a report from ""_Reuters_"":http://in.reuters.com/article/2013/08/08/usa-eminentdomain-richmond-idINL4N0G90IJ20130808.

""Mortgage Resolution Partners"":http://mortgageresolution.com/ is the firm that has been actively approaching different cities to propose the use of eminent domain as a solution to address underwater mortgages. As part of the plan, MRP would provide the funds to refinance the mortgages, then take a government-approved flat fee per mortgage, according to the firm's website.