Eminent Domain Controversy

Filed under: Market Comentary

eminent domainAn interesting controversy in the mortgage industry made headlines last week as the mayor of Richmond, California, Gayle McLaughlin, invoked eminent domain in an effort to save underwater homeowners from foreclosure. McLaughlin announced and immediately defended a plan to seize underwater mortgages from investors and re-offer them at fair market value to struggling homeowners.

According to Tara Steele of the Housing News, the theory behind the mayor’s plan is that residents are paying on mortgage balances substantially higher than the current value of their home, which is forcing them into foreclosure. And, as they approach foreclosure, the homeowners are no longer keeping up with their payments. This will make the foreclosures and vacancy rates increase, making local leaders suggest that crime will then also increase.

This eminent domain would result in a loss for the investors who currently back these mortgages, according to Housing News writer Destiny Bennett. The city of Richmond says that if the two parties are unable to reach a solution by August 14, it will definitely invoke the plan to take control of the underwater mortgages.

Los Angeles Times writer Alejandro Lazo wrote that in response to this possibility, the nation’s top housing finance regulator has threatened to “choke off” mortgage lending in cities that use eminent domain to seize underwater loans from lenders.

Last Thursday, the Federal Housing Finance Agency fired back at the city of Richmond. This came on the heels of a lawsuit directed by major Wall Street firms and US-sponsored mortgage giants Fannie Mae and Freddie Mac against the city of Richmond. The federal housing agency, which regulates Fannie Mae and Freddie Mac, said it does not intend to let the eminent domain happen. The agency, according to Lazo, would instruct Fannie and Freddie to “limit, restrict, or cease business activities” in any jurisdiction using eminent domain to seize mortgages.

The city of Richmond is the first to go forward with this plan, which is currently being debated in cities across California and the US.

According to Fannie Mae Chief Executive Timothy J Mayopoulos, the use of eminent domain is “a serious issue that has the potential to unsettle investors in mortgage securities.”

Guy Cecala, publisher of Inside Mortgage Finance said the move by the federal housing agency would be a “huge blow” to Richmond. He added, “It is pretty much a death sentence these days in terms of mortgage financing. It is sort of an atom bomb solution, and the real question is would they pull the trigger on it, or is it just a threat? But it is the kind of thing they could do fairly quickly.”

With the debate on this heating up, we will see where this leads.

Apart from this information, if you are currently looking at purchasing a home or if you have any questions on the mortgage industry, please give me a call and I will be happy to discuss anything with you.



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