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:

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

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

Eminent Domain Odds and Ends

A few odds and ends for our readers:

  • New Federal Eminent Domain Legislation:  According to the Eminent Domain Law Blog, two Senators have introduced a new bill, Protection of Homes, Small Businesses, and Private Property Act of 2012.  This, again, you may ask?  What ever happened with HR 1433, the Private Property Rights Protection Act of 2011?  HR 1433 appears to be dying a slow death, but the new 2012 bill seeks to pick up the slack.  In particular, it is targeted at the same issue:  preventing the federal government from using its eminent domain power and state and local governments from using federal funds to fund the use of eminent domain for economic development.  One problem:  HR 1433 had some teeth, providing for penalties and allowing owners to proceed with a private right of action to enforce non-compliance.  The 2012 version apparently lacks the enforcement and penalty mechanisms, but perhaps that's what is needed to get legislative support.
  • Battle for Brooklyn:  A Lawyer's Perspective:  We've written in the past about the documentary Battle for Brooklyn, which involved a property owner's fight against the use of eminent domain for the new Brooklyn Nets basketball arena.  If you're interested in a lawyer's perspective, you'll need to read Michael Rikon's article "I Represented the Devil of Brooklyn," which was recently published in the Practical Real Estate Lawyer.  For a great synopsis, visit our colleague Robert Thomas' blog, inversecondemnation.com
  • Hi-Ho Silverado:  According to an article in the Napa Valley Register, "City plans Saratoga Drive extension," the City of Napa may use eminent domain to temporarily acquire portions of properties along the Silverado Trail to construct a new road linking the highway with homes to the east.  The acquisition of temporary construction easements are common for public projects, but just because they are temporary does not mean there will not be impacts.  One impacted business, for example, will be required to vacate its property for 30 days in order to install an underground drainage system.


Local and National Redevelopment Updates

There are a number of redevelopment updates making headlines both in California and nationwide. 

National Redevelopment Update:

We've been following H.R. 1433 -- the "Private Property Rights Protection Act of 2011" --  a bill that would limit the power of eminent domain on a national platform.  We last reported in January that the bill was finally adopted by the House Judiciary Committee, and would next make its way to the House for approval.  According to an article on The Hill by Pete Kasperowicz, House votes to overturn Supreme Court decision on eminent domain, that next step has now occurred and the House approved the bill as well.  Now, the bill will move to the Senate.  Can it clear the last hurdle?  We shall see.

California Redevelopment Update:

While the redevelopment battle wages on nationally, here's a quick update on what's taking place here in California with the wind-down process.  There have been three bills introduced by the CRA to clean-up or otherwise alter the effects of AB1X 26:

  1. SB 1151:  instead of throwing all the redevelopment agency assets on the market now (which would likely flood the market and further reduce the return on assets), this bill would require the successor agency to prepare a long-range asset management plan that outlines a strategy for maximizing the long-term value of the real property and assets of the former redevelopment agency.  The agency would submit the plan on December 1, 2012 to the Department of Finance (DOF), and the DOF and oversight board would approve the plan by December 31.
  2. SB 1156:  this bill would enable cities and counties to establish a "community development and housing joint powers authority" to assume successor agency responsibilities and create an additional sales tax to fund sustainable economic development and affordable housing.
  3. SB 1220:  this bill, titled the "Housing Opportunity Trust Fund Act of 2012," would establish a permanent source of funding for afforable housing.  The funding would come through the imposition of a $75 fee on the recordation of each real-estate document, and such funds would be used to support the development, acquisition, rehabilitation, and preservation of afforable housing.

We'll let you know if these bills gain any traction.

Private Property Rights Protection Act of 2011 Approved by House Judiciary Committee

We've been closely tracking H.R. 1433 -- the "Private Property Rights Protection Action of 2011" -- a bill that would limit the power of eminent domain on a national platform.  (See our August and April 2011 posts.)   There hasn't been much action lately, but we finally saw some significant movement. 

According to an article by Lawrence Hurley in the E&E Reporter, "House panel approves bill limiting federal eminent domain power," the House Judiciary Committee finally approved the bill by an overwhelming 23-5 vote. Now, the legislation will move its way to the House for approval.

As a quick refresher, H.R. 1433 would do the following: 

  1. Prevent states and municipalities from using eminent domain for economic development purposes (such as redevelopment) if the agency receives federal economic development funds.
  2. Penalize any state or municipality that violates (1), above, by making the agency ineligible for federal economic development funds for 2 years.
  3. Prohibit the federal government from using eminent domain for economic development purposes. 
  4. Allow for enforcement of these provisions by (i) a property owner or tenant subject to eminent domain or (ii) the attorney general.
  5. Prevent any state or federal agency from using eminent domain to acquire property of a religious or non-profit institution by reason of that entity's non-profit or tax exempt status, or any quality related thereto.

With the elimination of redevelopment agencies in California, the bill -- if ultimately passed by the House and Senate -- likely will not have much impact here.  But for other states across the country, this is big news.   We'll see if the momentum continues and let you know what happens next.

So Long Kelo? Bill to Restrict Eminent Domain Up for Vote Today

While the redevelopment battle wages on in California, there's a somewhat similar discussion taking place on Capitol Hill.  We reported back in April about the House Judiciary Committee's consideration of H.R. 1433 -- the "Private Property Rights Protection Act of 2011" -- a bill that would prevent states and municipalities from using eminent domain for economic development purposes (such as redevelopment) on any project for which the agencies are receiving federal funding.  But there has not been much news since.  That may all change today.

According to an Energy & Environment Daily Report, lawmakers on the House Judiciary Committee are scheduled to vote today on the bill in an effort to respond to the Supreme Court's 2005 decision in Kelo v. City of New London.  So far, the bill has received Republican support, while Democrats have been a bit more skeptical.

Arizona's Republican Representative, Trent Franks, is quoted as saying that Congress should "restore the property rights protections that were erased from the Constitution by the Kelo decision."  New York's Democratic Representative, Jerrold Nadler, on the other hand, has expressed reservations about the bill and wants the Committee to seriously consider whether it strikes the right balance between property rights and economic development.

The bill has 24 sponsors, so it will be interesting to see how the Committee votes today.

UPDATE (5:00 pm):  according to our Washington insiders, the bill apparently was not voted on today.  We'll stay on top of this and keep you updated.

Eminent Domain Legislative Updates

I presented an update on eminent domain/redevelopment issues making their way through the legislature at this week's IRWA Chapter 67 (Orange County) monthly meeting, and I've received a few follow-up requests for more information.  So I decided it was probably worthwhile to put all the information here on the Nossaman blog. 

  • Status of California Redevelopment Agencies:  It's now been several weeks since the  attempted Assembly votes, where Governor Brown's attempt to eliminate redevelopment agencies fell one vote short.  The Governor needs the $2.2 billion in redevelopment funds this year to bridge the budget deficit.  It sounds like there is some intense back-channel lobbying taking place with the Redevelopment Association proposing a voluntary suspension of their funding or at least agreeing to contribute a portion of their revenue stream to local school districts.  I spoke with a few connected people this week and word is that Governor Brown's elimination plan -- at least as proposed -- is not likely to pass (aside from the Assembly, the proposal would also need to pass the Senate, which does not seem likely).  We'll just have to wait and see what ultimately comes of this.
  • Federal eminent domain legislation: The House is currently considering H.R. 1433, dubbed the "Private Property Rights Protection Act of 2011," which is a bill that would prevent states and municipalities from using eminent domain for economic development purposes (such as redevelopment) on any project for which the agencies are receiving federal funding.  H.R. 1433 also prohibits the federal government from using eminent domain for economic development (including increasing tax revenue or creating jobs for general economic growth).
  • Use of Redevelopment Funds for Sports Teams:  Assemblyman Chris Norby (Fullerton) has introduced AB 1234, which would prohibit redevelopment agencies from using tax revenue or bond proceeds to develop, recruit, or retain any professional sports teams.  This legislation, if passed, could potentially kill a new stadium for the Oakland A's or the San Diego Chargers, which are both being contemplated through the use of redevelopment funds.  (In case you missed it, read a more detailed article here.)
  • Inverse Condemnation LiabilityAB 328 is also working its way through the State Assembly; it is a bill that would require a reduction in compensation payable to a successful plaintiff in an inverse condemnation action in direct proportion to the owner's percentage of fault in causing damages to the owner's property. This would change current law whereby a public entity is liable for 100% of the damages where its project causes physical damage to private property, regardless of whether others contributed to those damages.
  • Renewable Energy Mandates:  This week, Governor Brown signed Senate Bill 2X, which requires private and public utilities to obtain 33% of their electricity from renewable energy resources by 2020, raising the target from the current 20%, while providing the flexibility necessary to meet the higher standard.

We'll follow-up on these legislative issues as soon as we catch wind of anything newsworthy.