The Federal Housing Finance Agency is against the idea of government officials using eminent domain to restructure performing, underwater mortgages. So much so, the federal agency says it may do whatever it can to stop such initiatives.
"As conservator of Fannie Mae and Freddie Mac and regulator of 12 Federal Home Loan Banks, FHFA has significant concerns about the use of eminent domain to revise existing financial contracts and the alteration of the value of the companies' securities holdings," the FHFA said in a statement.
"FHFA has determined that action may be necessary on its part to avoid a risk to safe and sound operations at its regulated entities and to avoid taxpayer expense. Additionally, FHFA has concerns that such programs could negatively affect the extension of credit to borrowers seeking to become homeowners and on investors that support the housing market," the GSE conservator added.
The housing agency's response comes on the heels of local counties and municipalities proposing the use of eminent domain to seize underwater mortgages from investors for the purpose of restructuring the loans to aid borrowers.
The City of Chicago recently planned a hearing to discuss the use of eminent domain to save mortgages. But the proposal first popped up in San Bernardino, Calif., after venture capital firm Mortgage Resolution Partners pitched the idea of local governments using the power of eminent domain to seize and restructure underwater mortgages.
"From a market perspective, if performing mortgage loans are taken from their holders, this will cause significant losses which will be borne by the pension plans and individual citizens who are invested in the securities," said Kenneth Bentsen, executive vice president for public policy and advocacy, for SIFMA, a securities industry trade group. "The use of eminent domain will do more harm than good, and the worst harm will be felt by future borrowers who will inevitably pay higher rates for home mortgages."