Congress Gets Bill Prohibiting Eminent Domain Mortgage Seizures

Congress just stepped into the disputernover the right of Chicago and two communities in California to use eminentrndomain on behalf of local homeowners. rnRepresentative John Campbell (R-CA) today introduced a bill titled The Defending American Taxpayers fromrnAbusive Government Takings Act which would prohibit the four majorrngovernment sponsored mortgage providers from buying loans in any community whorndo what is proposed in Chicago, Berkeley and San Bernardino County, California.</p

To summarize the controversy, SanrnBernardino County proposed in June to use eminent domain to invoke eminentrndomain to take underwater mortgages from investor pool and restructure them tornreflect the current market value of collateral to provide relief tornhomeowners.  The municipality would thenrnpackage the loans into pools and sell them on the secondary market.</p

There was an immediate negative reaction</aby at least twenty trade organizations led by SIFMA the lobbing grouprnrepresenting the securities industry.  ThernFederal Housing Finance Agency (FHFA) as conservator for GSEs also joined inrnand has just ended a period of public comment on the subject.  All opposing parties maintain that suchrnseizures constitute an unconstitutional use of the eminent domain power and anrnunwarranted abridgement of investors' property rights.  SIFMA has also made it clear they wouldrnlitigate any eminent domain action and that it would be unlikely that any furtherrnloans would be available to homeowners in those communities. </p

Campbell bases his legislation on arnclaim that if seizing of mortgage loans becomes widespread, the GSEs willrnsustain losses of up to 30 percent in their private-label residentialrnmortgage-backed securities portfolio putting taxpayer dollars at risk.  He further maintains that current and futurernretirees are also at risk because of the significant amounts of thesernsecurities held in public and private retirement funds, 401(k) programs andrnother investment vehicles.  He furtherrnmaintains that any takings would break a private contract agreed to byrnhomeowners and their lenders.</p

The proposed law would amend the chartersrnof the two GSEs to prohibit them and would outright ban the Federal HousingrnAdministration (FHA) and the Veterans Administration (VA) from purchasingrnmortgage loans originated in counties where a municipality has seized arnmortgage loan using eminent domain within the previous 10 years.</p

As anrnalternative to the eminent domain program, Campbell and Representative GaryrnPeters (D-MI) have introduced H.R. 5940, the Preserving American HomeownershiprnAct. This bill would direct FHFA to establish a program to pilot principalrnreduction programs for loans owned or guaranteed by Fannie Mae and Freddie Mac.  This could also be an interesting developmentrnas FHFA’s acting director Edward J. DeMarco has been adamant about refusing tornpermit principal reductions despite considerable pressure from the Departmentrnof the Treasury. </p

“There isrnno question that we need to take steps to assist American homeowners inrndistress,” Campbell saidrnwhen introducing his bill.  “But, these steps must not undermine rule of law, mustrnnot engage in corruptive and abusive practices, must protect the Americanrntaxpayer, and must not further degrade the housing market. The eminent domainrnprograms in question are atrocious, corruptive, irresponsible andrnunconstitutional. We do need to fix the housing sector, but it must be done inrna way that does not break the law and does not enrich undeserving,rnpolitically-connected entities in cities and counties with unsustainable budgetrndeficits.”</p

The Mortgage Bankers Associationrn(MBA) quickly endorsed the legislation. rnMBA President and CEO David H. Stevens issued a statement which said inrnpart, “While the problem of underwater borrowers continues to slow the housingrnrecovery, using eminent domain to take those mortgages is not a responsiblernanswer.  Beyond the obvious legal issues of using eminent domain in such arnradical way, the government seizing mortgages would set a precedent that willrnhurt those communities and borrowers it is most designed to help.</p

“CongressmanrnCampbell’s bill, on top of limiting the future cost to taxpayers associatedrnwith the losses that would be incurred by Fannie Mae, Freddie Mac, FHA and thernVA, sends a clear message to municipalities considering eminent domain — ifrnyou do this, there will be consequences for your constituents, consequencesrnthat will severely impact not only potential home buyers and home owners, butrnthe value of every home in your area.</p

KennethrnE. Bentsen, Jr., executive vice president for SIFMA also commended Campbellrnsaying of the legislation, “(It) will help protect our mortgage markets,rnmortgage borrowers, investors and main street savers by prohibiting anyrnmortgage seized through eminent domain from using a government guarantee andrnputting taxpayers at risk. The use of eminent domain to seize mortgages notrnonly lacks legal and constitutional validity; it has the potential to scuttle arnhousing market that is working towards recovery and does so at the expense of pensionrnfunds and mutual fund investors. </p

Campbell’srnbill has been referred to the House Committee on Financial Services.

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