A controversial plan that would allow municipal governments to rescue underwater homeowners by taking over their loans through the power of eminent domain is getting pushback from the Hill in Washington D.C. as more investors complain.
Rep. John Campbell, R-Calif., reintroduced 'The Defending American Taxpayers from Abusive Government Takings Act' this week. His bill aims to stop firms – such as Mortgage Resolution Partners – from successfully devising plans that would allow city officials to use the power of eminent domain to take over mortgages for the purpose of restructuring those debts to help homeowners.
Investors and investment advocacy groups reacted to the bill Thursday.
"SIFMA commends Congressman Campbell on his introduction of a bill that would limit the risk posed to the federal government by municipalities that choose to adopt ill-advised plans to seize mortgage loans from Main Street investors," said SIFMA CEO Judd Gregg and president Kenneth Bentsen Jr. "These actions would pose a risk to the safety and soundness of both the GSEs and FHA's insurance fund, and will serve to further delay the return of private capital in housing finance."
Investors in mortgage securities have been fighting eminent domain in the press for months, but now it seems lawmakers are ready to pile on.
Rep. Campbell’s legislation would prohibit Fannie Mae andFreddie Mac from purchasing any loans that are tied to properties in municipalities using eminent domain in this fashion.
The bill also would prevent the FHA and Department of Agriculture from insuring or making loans in these jurisdictions.
"Using eminent domain to seize mortgages is not only legally questionable," said Rep. Campbell, "it represents a complete abrogation of private property rights. The federal government and the American taxpayer would be forced to bear all the risk in the event of a failure. Further, these schemes pose a critical threat to recovery of the housing sector as lenders and investors that a sustainable housing finance system rely on would not have any faith in the durability of contracts."
Rep. Jeb Hensarling, R-Texas, who serves as chair of the House Financial Services Committee, also was applauded by SIFMA for including a provision in his housing finance reform plan to block the usage of eminent domain.