from The Sun
The federal agency tasked with regulating the nation’s government-backed mortgage firms said it may oppose local agencies’ efforts to use eminent domain to take over underwater mortgages.
The controversial plan is being considered for use in San Bernardino County, where an estimated 150,000 homeowners owe more on their mortgages than their homes are worth.
Proponents say the plan could give struggling homeowners a better shot at refinancing their mortgages.
But the Federal Housing Finance Agency suggested otherwise on Wednesday.
“(The Federal Housing Finance Agency) has determined that action may be necessary on its part as conservator for the enterprises (Freddie Mac and Fannie Mae) and as regulator for the (federal home loan) banks to avoid a risk to safe and sound operations and to avoid taxpayer expense,” the agency declared in a Federal Register entry.
Federal officials’ entry into the eminent domain-for-mortgages debate comes before a San Bernardino County agency created specifically to address underwater homeowners’ problems officially considers the idea.
Even so, the concept is gaining attention from coast to coast as interests line up to oppose the idea or follow the the county’s lead and consider the concept on their own.
For example, Chicago officials are expected to hold hearings on the idea next week. On the other side, business groups including the Inland Valleys Association of Realtors and others representing the financial services industry oppose the plan.
The idea itself comes from Mortgage Resolution Partners, a San Francisco investment group. The concept rests on the idea of local governments using eminent-domain powers to buy private-label mortgage backed securities.
Mortgage Resolution Partners proposes to raise private money to bankroll those purchases. Its founders say homeowners whose outstanding mortgage debt exceeds the market value of their house will have a better shot at refinancing if local governments own the note.
San Bernardino County and the cities of Ontario and Fontana have formed a special agency to consider the investment firm’s idea, along with other proposals. The agency has power of eminent domain and is likely to send out a formal request for proposals when it meets Aug.16.
If Mortgage Resolution Partners’ proposal is adopted and works as designed, the firm would collect fees for its services. Its investors would own the revenue stream from homeowners mortgage payments.
But the potential transfer of mortgage-backed securities from current investors to Mortgage Resolution Partners’ backers is one reason the FHFA is questioning the plan.
The agency holds government-sponsored mortgage investors Fannie Mae and Freddie Mac, which own private-label mortgage backed securities, in conservatorship. The FHFA asserts that any investment losses could be borne by taxpayers if local officials use eminent domain to buy mortgages.
The agency also warns that the plan could create a chilling effect in which lenders would be unwilling to issue new mortgages.
Mortgage Resolution Partners replied in a statement that paying fair value for mortgages means that securities holders or taxpayers will not cause any losses beyond what has already occurred after the post-2007 housing market collapse.
The investment firm’s statement also argued that other uses of eminent domain have not created a “chilling effect” on other financial activities and maintained the financial system will function better if underwater homeowners’ problems are solved.
“Clearing homeowners’ debt will be necessary to support normal lending practices,” read a statement attributed to Mortgage Resolution Partners Chairman Steven Gluckstern.
San Bernardino County spokesman David Wert said the FHFA is welcome to send its concerns to the joint-powers authority involving San Bernardino County, Fontana and Ontario officials.
But Wert also defended the authority’s right to consider controversial ideas like the ones proposed by Mortgage Resolution Partners.
“Assisting homeowners with out-of-whack mortgages is not a traditional role of local government, but this has fallen into our laps because other solutions haven’t been forthcoming,” Wert said.