Freddie Mac Threatens Eminent Domain Suit

Freddie Mac fired a warning shot in therndirection of the City of Richmond California today, threatening tornsue if the city moves forward with its plan to seize over 600rnunderwater mortgages on properties located in the city. Richmondrnsent letters to mortgage servicers last week asking to buy thernmortgages but making it clear it would use its power of eminentrndomain to take the mortgages if the servicers did not sellrnvoluntarily. </p

Richmond is among a handful of citiesrnnationwide who have announced their intentions of using eminentrndomain in such a manner, hoping to restructure the loans at thernactual market value of the underlying collateral in an effort to keeprnhomeowners from losing their homes. The plan, first put forward byrnSan Bernardino County, California has provoked a storm of protestrnfrom groups representing investors in mortgage-backed securities asrnwell as introduction of a law in Congress which would penalizerncommunities that carried out such plans. San Bernardino recentlyrnannounced it was no longer considering the plan.</p

In arnconference call to discuss second quarter financial results releasedrntoday, Freddie Mac’s general counsel William McDavid said “Ourrnsense is that those so-called voluntarily loan sales would not bernvery voluntary. They’re loan sales under pressure – in fact, under arnthreat of seizure by eminent domain. We would consider taking legalrnaction.”</p

Reutersrnquoted Denise Dunckel, spokesperson for the Federal Housing FinancernAgency (FHFA), regulator of Freddie Mac and its sister companyrnFannie Mae as saying “Fannie Mae and Freddie Mac are investorsrnin these securities. This is an issue that we are discussing.” The two companies, under federal conservatorship since 2008, wouldrnneed FHFA approval before taking any legal action, a situation thatrnMcDavid acknowledged in talking to reporters.</p

Richmond and other cities have beenrnworking with San Francisco-based Mortgage Resolution Partners (MRP),rna private investment firm that proposes raising private money forrnfinancing the loan purchases. MRP would restructure the loans forrnresale on the secondary market and would receive a fee for each loanrnrestructured, The Wall Street Journal</isaid that 444 of the 624 loans Richmond is proposing to buy arerncurrent on their payments.