Rep. John Campbell, R-Calif., introduced federal legislation Thursday to prohibit the government from backing mortgages in areas where underwater loans are seized through eminent domain.

The bill amends Fannie Mae and Freddie Mac charters, forbidding them from financing loans in counties or cities that cleared such eminent domain plans within the previous 10 years. It also keeps the Federal Housing Administration and the Department of Veterans Affairs from insuring mortgages in these areas.

The government financed roughly 95% of the mortgage market since it crashed in 2007.

Several local governments in areas hardest hit by that crisis are considering eminent domain plans proposed by an investor group led by Mortgage Resolution Partners. Using the private capital to pay bond investors at a determined market value, the loan will be written down and refinanced into a government-backed mortgage.

In San Bernardino County, where officials will likely move ahead with a formal request for proposals in October, MRP estimated up to 42,000 current and delinquent loans could be targeted. Roughly 44% of the population there owes more on their loan than their home is worth.

Chicago is also considering the plan.

"There is no question that we need to take steps to assist American homeowners in distress, 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," Campbell said in a statement. "The eminent domain programs in question are atrocious, corruptive, irresponsible and unconstitutional."

Studies showed if the eminent domain plan grows widespread, the GSEs could lose up to 30% on the mortgage bonds they own. Meanwhile, industry groups allege MRP and its investors could profit 30% of the loans the governments acquire for it.

Industry groups and bond investors are lobbying federal regulators to punish these areas by eliminating or constricting government-backed mortgage credit in the future. Eminent domain experts have said the plan will likely be held up in courts that have rarely ruled against the practice even when private companies profit off the power.

Campbell and Rep. Gary Peters, D-Mich., previously introduced a bill ordering Fannie and Freddie to pilot a principal reduction program. The Federal Housing Finance Agency rejects write-downs on GSE loans, and the bill stalled in committee.

With the lawmakers scrambling to avoid massive spending cuts at the start of next year and a potential government shut down in the near future, the legislation will have a difficult time making it far in Congress until after the election in November.

"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 deficits," Campbell said.

The Mortgage Bankers Association immediately backed the bill.

"Congressman 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," said the group's CEO David Stevens.

jprior@housingwire.com