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HUD doubts eminent domain strategy

The litigation risk alone is overwhelming, HUD's Mincberg says

hazard light

The pushback against eminent domain is growing. And if the Mortgage Bankers Association needed the backing of the housing agencies and regulators to steer counties away from eminent domain proposals, it looks like they got it.

Opponents of the plans caught a big ally this week when the Department of Housing and Urban Development publicly raised concerns about eminent domain in a letter to Congress this week. This public announcement is big news, considering the FHA would unwittingly play a big role if the counties were to watch their eminent domain deals play out.

A key component of the eminent domain plan is to use 'eminent domain powers' to seize mortgages, refinancing the loans through the Federal Housing Administration after being seized and written down by a local municipality, Compass Point explained.

However, HUD acting assistant secretary Elliot Mincberg is doubtful this strategy will survive.

"Pending legal developments and possible further execution of the plans in question, HUD does not know whether any new mortgage which might be created would qualify for insurance by the Federal Housing Administration (FHA)," Mincberg explained.

HUD’s comments came a week after the Federal Finance Housing Agency issued a letter stating it would consider directing the government-sponsored enterprises to stop doing business in communities that seize mortgages through eminent domain, including Richmond, Calif.

While HUD remains noncommittal to the plan, analysts for Compass Point believe its commentary regarding the qualifications for refinancing through the FHA is meaningful.

"We believe that Richmond, Calif. will proceed with its plan to use eminent domain to size and refinance underwater mortgages," said Isaac Boltanskiy.

He added, "We do not believe, however, that eminent domain will be embraced on a large scale due to both legal and practical concerns. Still, efforts will likely continue until a test case can weave its way through the courts and Richmond, Calif. appears to be that case."

On a similar note, Mortgage Bankers Association president and chief executive officer David Stevens said eminent domain is going to involve clear legal action, which raises the question as to whether known litigation risk becomes a disclosure requirement and makes the loans uninsurable in the first place.

"We’ve already seen public comments made by the government-sponsored enterprises that are much clearer than HUD’s letter, stating that they wouldn’t see a way that these loans would be acceptable," Stevens explained.

He added, "From our perspective, it would seem to be a violation of the disclosure requirements to re-originate these loans using FHA insurance as well. It’s a clear known disclosure variable and we expect legal challenges on each individual transaction as they occur."

Last week, Fannie Mae and Freddie Mac joined investors in authorizing a lawsuit to stop Richmond, Calif., from seizing mortgages through the eminent domain program.

While the market is aware of the problems the municipality faces, Stevens pointed out that Richmond, Calif. Mayor Gayle McLaughlin is underestimating the legal risks the community will be inheriting through the use of the program.

"There’s going to be limited ability to finance any home in this community going forward," Stevens said.

He concluded, "The program is doing far more harm than good to hurt a community that’s already struggling."

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