Eminent Domain and Underwater Mortgages: Federal Government to Weigh in on Proposal

This underwater mortgage / eminent domain issue does not appear to be going away any time soon.  Along with eminent domain attorneys Robert Thomas from Hawaii, Casey Pipes from Alabama, and Tom Olsen from New Jersey, I spoke last Friday at the ABA Annual Meeting in Chicago -- one of the cities apparently considering the plan.  The presentation itself did not focus on the underwater mortgage plan, but many of the questions at the end did.  Indeed, the issue generated more buzz in the room, by far, than any other. 

This week, the news is that the Federal Housing Finance Agency ("FHFA") has posted a Notice in the Federal Register seeking input on the plan.  In the Notice, FHFA notes its "concerns" about the plan:

FHFA has significant concerns about the use of eminent domain to revise existing financial contracts and the alteration of the value of [Fannie Mae / Freddie Mac] or Bank securities holdings. In the case of [Fannie Mae and Freddie Mac], resulting losses from such a program would represent a cost ultimately borne by taxpayers. At the same time, FHFA has significant concerns with programs that could undermine and have a chilling effect on the extension of credit to borrowers seeking to become homeowners and on investors that support the housing market.

An August 8 article in Reuters by Sam Forgione, FHFA raises concerns about eminent domain plan, describes the Notice and the response by plan proponent Mortgage Resolution Partners.

FHFA's concerns are not new, but it is significant that FHFA has given them a formal voice.  On the other hand, it's not entirely clear what FHFA might do about these "concerns."  Unless the plan violates the federal constitution -- and I've already explained why I believe that is not the case -- the plan will be debated and ultimately litigated largely under state laws.  FHFA has no jurisdiction to command states on how they should interpret their own laws. 

Granted, the federal government can wield a pretty heavy weapon when it wants to.  While it cannot command the states or local governments directly, it can impose strings on the receipt of federal money.  It does this by telling states/local governments that if they do "X" (whatever the feds want to avoid), the agencies will lose "Y" federal funding.  Often, the amount of funding at stake is more than enough to deter the agencies from engaging in the "offensive" conduct. 

Indeed, this is the exact mechanism proposed in H.R. 1433, the federal legislation designed to prevent Kelo-type use of eminent domain.  The legislation is hopelessly bogged down in the Senate Judiciary Committee after passing in the House in February.  If it were to pass, however, it would impose a two-year ban on the receipt of federal economic development funds for any agency that uses eminent domain to take private property in order to transfer it to another private owner for their private use.

But it would be hugely premature to assume the federal government will seek to impose such strings to prevent agencies from implementing the underwater mortgage plan.  Still, plan proponents cannot be happy at FHFA's Notice. 

FHFA is accepting comments on the plan through September 7.  If you want to provide input, you can send it to:

FHFA OGC
400 Seventh Street SW., Eighth Floor
Washington, DC 20024

Alternatively, you can email it to FHFA OGC at eminentdomainOGC@fhfa.gov

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