Eminent domain debate turns the mortgage industry libertarian
A controversial Supreme Court case begins to challenge investor interests
When former Supreme Court Justice David Souter became the deciding vote in the precedential eminent domain case, Kelo v. New London, his vote alienated hard-core libertarians and constitutionalists, who viewed the case as an assault on property rights.
Kelo in essence held that the government could allow the seizure of property in private transactions as long as the taking constituted some type of public usage. Free-market types were not amused, causing them to camp outside Justice Souter’s farm to shame him as a turncoat on constitutional issues.
Fast-forward eight years, and somehow mortgage investors and a large part of the mortgage industry – including the Federal Housing Finance Agency, the GSEs and the Mortgage Bankers Association – are now fighting eminent domain, putting them on the side of die-hard constitutionalists.
Eminent domain, of course, is now a viable idea in Richmond, Calif., where the advisory firm Mortgage Resolution Partners managed to gain the attention of city officials in a bid to use eminent domain to seize underwater mortgages from investors to restructure those debts for borrowers.
The pushback continues, with pensioners and institutional investors now suing to ensure eminent domain is not allowed to disrupt investors' interests in bundled mortgages.
FHFA released a statement Thursday, saying:
“In response to an eminent domain action to restructure mortgage loans, FHFA may take any of the following steps: initiate legal challenges to any local or state action that sanctions the use of eminent domain to restructure mortgage loan contracts that affect FHFA’s regulated entities; act by order or by regulation to direct the regulated entities to limit, restrict or cease business activities within the jurisdiction of any state or local authority employing eminent domain to restructure mortgage loan contracts; or take such other actions as may be appropriate to respond to market uncertainty or increased costs created by any movement to put in place such programs.”
In other words, eminent domain, which spooked die-hard constitutionalists years ago, is no longer just the enemy of libertarians or fringe groups that sat outside Justice Souter’s home in protest. The mortgage industry has now seen how far eminent domain initiatives can go, and everyone is far from amused.