Magazine article American Banker

FHFA Sharply Criticizes Eminent Domain Plans

Magazine article American Banker

FHFA Sharply Criticizes Eminent Domain Plans

Article excerpt

Byline: Donna Borak

WASHINGTON a The Federal Housing Finance Agency on Wednesday slammed plans by some local governments to use eminent domain to refinance underwater mortgages.

The agency, which oversees Fannie Mae and Freddie Mac, said seizing loans from private investors may increase taxpayer losses on the government-sponsored enterprises and ultimately spur a credit crunch in the mortgage market.

"FHFA has significant concerns about the use of eminent domain to revise existing financial contracts and the alteration of the value of enterprise or bank securities holding," the agency wrote in a notice.

The agency said it would take action, if necessary, to protect the operations of both GSEs and prevent any additional cost to the taxpayer. It stopped short of specifying what steps it could take.

Under eminent domain, localities purchase underwater mortgages out of a securitized package of loans at a steep discount, then write them down to fair value and create a new mortgage with a significantly reduced principal and monthly payment.

The FHFA warned that "resulting losses from such a program would represent a cost ultimately borne by taxpayers" and that it could "have a chilling effect on the extension of credit to borrowers seeking to become homeowners and on investors that support the housing market."

The notice by the agency follows a decision last week by the city council in Berkley, Calif. to endorse the potential use of eminent domain to refinance borrowers. Chicago and two California cities, Fontana and Ontario, are considering possible eminent domain plans. …

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