Eminent Domain Calls Down Thunder From FHFA

When
municipalities like San Bernardino County, California, Chicago,
Brockton, Massachusetts, and Richmond California first proposed using
their power of eminent domain to gain control of underwater mortgages
in their localities, restructure and resell them the Federal Housing
Finance Agency (FHFA) became concerned about the impact on Freddie
Mac and Fannie Mae (the GSEs) and the Federal Home Loan Banks
(FHLBanks). As conservator of the GSE’s and regulator of FHLBanks,
FHFA feared that widespread seizures of the loans (with compensation
based on the value of the collateral property) would diminish asset
values among all three.

On
August 9, 2012 FHFA published a notice in the Federal Register
soliciting public comment on
“The Use of Eminent Domain to Restructure Performing Loans.” On
Wednesday it released a memorandum reviewing the topic, the input
received, and implications for FHFA.

FHFA
said it received 75 comments, almost evenly divided between
supporters and opponents of the proposed use of eminent domain.
Comments come from individuals in government, private sector
financial institutions, labor unions, businesses, academics, and
interest groups representing homeowners and businesses involved in
financial markets.

The
general thrust of comments fell into two categories; those supporting
the use of eminent domain as appropriate for localities and effective
for homeowners and those opposing it as violating law, eroding the
value of existing financial obligations, and destabilizing the
housing finance markets. Supporters contended that, as the mortgage
securities have lost value, then a proper and fair valuation of
mortgages would result in no loss to the investor but would benefit
the homeowner. Further they argued that FHFA had no role to play in
a local or state action. Opponents saw numerous legal issues, some
center on the specific use of eminent domain and others on
constitutional or financial issues in terms of upsetting existing
contracts and creating uncertainty for providing and pricing capital.

From
FHFA’s perspective, this use of eminent domain set up a conflict
between federal and state interests
. In this
case the interest is that of the Conservator to preserve assets and
that of the regulator to ensure the safety and soundness of the
FHLBanks. In such state/federal conflicts, federal interests nearly
always prevail.

Assuming
that a valid state interest exists and is not preempted by federal
interests the legality of this use of eminent domain still remains in
doubt FHFA says. Can eminent domain be utilized for intangible
assets? State laws authorize eminent domain by localities and
intangibility may not be covered in certain states.

Second,
does taking an intangible asset that is performing and creates no
threat to the community nor present any certainty it will stop
performing violate the Contracts Clause of the Constitution that
prohibits impairing the obligations of a contract, Since
mortgage-backed securities are traded nationally and internationally,
can the action of the locality be seen as a violation of the Commerce
Clause
which requires states not to interfere with interstate
commerce unless there is a legitimate state interest, the state has
chosen the least burdensome means of promoting that interest and the
interest outweighs the burden on interstate commerce.

Third,
since using eminent domain for underwater borrowers could target only
certain areas of a community, might this raise issues about redlining
and fair housing laws?

FHFA
also raised a half dozen non-legal issues in its Federal
Register
entry including
problems and costs of determining value, the lack of a uniform
national structure such as programs like HAMP have and centralized
oversight, liability, and ultimate limitations on the availability of
credit or higher costs of credit.

FHFA
concludes
that, after conducting a review of law and markets and
considering the public input it received the use of eminent domain by
localities in the manner proposed presents a clear threat to the safe
and sound operations of (the GSEs and FHLBanks) as provided in
federal law and would run contrary to the goals set forth by Congress
for the conservatorship.

Therefore,
it says, it considers the matter one “that may require use of its
statutory authorities
.” It says it may take any of the following
steps:

  • Initiate
    legal challenges
    to any local or state action that sanctions the use
    of eminent domain to restructure loan contracts that affect FHFA’s
    regulated entities;

  • Act
    by order or by regulation to direct the regulated entities to limit,
    restrict, or cease business activities within the jurisdiction of
    any state or local authority employing eminent domain to restructure
    mortgage loan contracts; or

  • Take
    such other actions as may be appropriate to respond to market
    uncertainty or increases costs created by any movement to put in
    place such programs.

Translation: The FHFA will fight Eminent domain in court.  They’ll cut off involved municipalities from access to Fannie/Freddie loans, and just for good measure the third bullet point is essentially saying “whatever it takes.”  This isn’t just another random FHFA press-release-style communication, but a memorandum signed by Alfred M. Pallard, FHFA General Counsel.

Article source: http://www.mortgagenewsdaily.com/08092013_eminent_domain.asp

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