The Federal Housing Finance Agency (FHFA)
will post a notice in the Federal
Register on Thursday announcing that it was open to input from any persons
with views on the subject of eminent domain as a mechanism to restructure
performing loans. The agency thereby
entered the growing controversy around the subject.
As background, in June the Board of
Supervisors in San Bernardino County California announced a Homeowner
Protection Program in which they proposed to use their power of eminent domain
to take underwater mortgages from lenders and restructure them for borrowers at
the fair market price. Officials in
Berkeley, California and Chicago subsequently passed similar measures.
The San Bernardino action immediately
triggered a response from SIFMA, the trade organization representing the
securities industry, protesting the proposed actions and indicating that such
an action would trigger litigation against the local governments and ultimately
backfire on the communities' borrowers, limiting credit in the future. In response to those comments, California
Lieutenant Governor Gavin Newsom politely told SIMFA to shut up.
FHFA has now expressed its concern over
the proposals. Citing its role as
conservator of Freddie Mac and Fannie Mae (the GSEs), FHFA said its obligation
is to preserve and conserve the GSE's assets and to minimize costs to
taxpayers. These entities purchase a
large portion of the mortgages originated in the U.S. the notice says, and they
hold private label mortgage backed securities containing pools of non-GSE
loans. The Banks also have large
holdings of such securities and accept collateral that consists of mortgages of
member financial firms pledged in exchange for advances of funds.
The notice, signed by FHFA COO Richard
Hornsby says the agency has significant concerns about the use of eminent
domains to revise existing financial contracts and the alternation of the value
of GSE or bank securities holdings. In
the case of the GSEs resulting losses would ultimately be borne by
taxpayers. FHFA also expressed concern
that the programs could undermine and "have a chilling effect" on the extension
of credit by investors that support the housing market.
The agency said it has determined that
it might need to take action both as conservator of the GSEs and regulator for
banks to avoid a risk to safe and sound operations and avoid taxpayer expense. The proposed use of eminent domain raises
issues about the constitutionality of such an action, the application of federal
and state consumer protection laws, the effects on holders of existing
securities and on millions of negotiated and performing mortgage contracts. There are also issues regarding the role of
the courts in administering or overseeing such a program and, in particular,
critical issues surrounding the valuation by local governments (as is typical
in eminent domain proceedings) of complex contractual arrangements that are
traded in national and international markets.
Anyone wishing to comment can do so
through the FHFA Office of General Counsel on or before September 7.