Congress just stepped into the dispute
over the right of Chicago and two communities in California to use eminent
domain on behalf of local homeowners.
Representative John Campbell (R-CA) today introduced a bill titled The Defending American Taxpayers from
Abusive Government Takings Act which would prohibit the four major
government sponsored mortgage providers from buying loans in any community who
do what is proposed in Chicago, Berkeley and San Bernardino County, California.
To summarize the controversy, San
Bernardino County proposed in June to use eminent domain to invoke eminent
domain to take underwater mortgages from investor pool and restructure them to
reflect the current market value of collateral to provide relief to
homeowners. The municipality would then
package the loans into pools and sell them on the secondary market.
There was an immediate negative reaction
by at least twenty trade organizations led by SIFMA the lobbing group
representing the securities industry. The
Federal Housing Finance Agency (FHFA) as conservator for GSEs also joined in
and has just ended a period of public comment on the subject. All opposing parties maintain that such
seizures constitute an unconstitutional use of the eminent domain power and an
unwarranted abridgement of investors' property rights. SIFMA has also made it clear they would
litigate any eminent domain action and that it would be unlikely that any further
loans would be available to homeowners in those communities.
Campbell bases his legislation on a
claim that if seizing of mortgage loans becomes widespread, the GSEs will
sustain losses of up to 30 percent in their private-label residential
mortgage-backed securities portfolio putting taxpayer dollars at risk. He further maintains that current and future
retirees are also at risk because of the significant amounts of these
securities held in public and private retirement funds, 401(k) programs and
other investment vehicles. He further
maintains that any takings would break a private contract agreed to by
homeowners and their lenders.
The proposed law would amend the charters
of the two GSEs to prohibit them and would outright ban the Federal Housing
Administration (FHA) and the Veterans Administration (VA) from purchasing
mortgage loans originated in counties where a municipality has seized a
mortgage loan using eminent domain within the previous 10 years.
alternative to the eminent domain program, Campbell and Representative Gary
Peters (D-MI) have introduced H.R. 5940, the Preserving American Homeownership
Act. This bill would direct FHFA to establish a program to pilot principal
reduction programs for loans owned or guaranteed by Fannie Mae and Freddie Mac. This could also be an interesting development
as FHFA's acting director Edward J. DeMarco has been adamant about refusing to
permit principal reductions despite considerable pressure from the Department
of the Treasury.
no question that we need to take steps to assist American homeowners in
distress," Campbell said
when introducing his bill. "But, these steps must not undermine rule of law, must
not engage in corruptive and abusive practices, must protect the American
taxpayer, and must not further degrade the housing market. The eminent domain
programs in question are atrocious, corruptive, irresponsible and
unconstitutional. We do need to fix the housing sector, but it must be done in
a way that does not break the law and does not enrich undeserving,
politically-connected entities in cities and counties with unsustainable budget
The Mortgage Bankers Association
(MBA) quickly endorsed the legislation.
MBA President and CEO David H. Stevens issued a statement which said in
part, "While the problem of underwater borrowers continues to slow the housing
recovery, using eminent domain to take those mortgages is not a responsible
answer. Beyond the obvious legal issues of using eminent domain in such a
radical way, the government seizing mortgages would set a precedent that will
hurt those communities and borrowers it is most designed to help.
Campbell's bill, on top of limiting the future cost to taxpayers associated
with the losses that would be incurred by Fannie Mae, Freddie Mac, FHA and the
VA, sends a clear message to municipalities considering eminent domain -- if
you do this, there will be consequences for your constituents, consequences
that will severely impact not only potential home buyers and home owners, but
the value of every home in your area.
E. Bentsen, Jr., executive vice president for SIFMA also commended Campbell
saying of the legislation, "(It) will help protect our mortgage markets,
mortgage borrowers, investors and main street savers by prohibiting any
mortgage seized through eminent domain from using a government guarantee and
putting taxpayers at risk. The use of eminent domain to seize mortgages not
only lacks legal and constitutional validity; it has the potential to scuttle a
housing market that is working towards recovery and does so at the expense of pension
funds and mutual fund investors.
bill has been referred to the House Committee on Financial Services.