For those whose lives are not consumed by the comings and goings of federal housing policy, let me digress with some background. The FHFA is the regulator in charge of supervising, regulating and overseeing Fannie Mae and Freddie Mac (often lumped together as “Government Sponsored Entities” or the “GSEs”) and the Federal Home Loan Banks (“FHLBanks”).
The GSEs “guaranteed bonds backed by roughly $270 billion of the $405 billion of new home loans originated last quarter”. They Own more than$100 billion of non-agency securities that could be impacted by the eminent domain plan. Taxpayers have spent about $170 billion to rescue them and they have paid back about $46 billion in dividends to date. Combined they own or guarantee about $5 trillion in U.S. home mortgages (about half the overall market).
The FHFA mission statement is “to promote their [the GSEs’ and FHLBanks’] safety and soundness, and support housing finance and affordable housing and support a stable and liquid mortgage market”. Given its mission statement, FHFA’s opposition seems to be both appropriate and timely.
As we have previously discussed, the plan proposed by Mortgage Resolution Partners which seeks to use eminent domain as a means of altering existing performing mortgage loan excludes debt guaranteed by the GSEs. Given that fact, what explains the strong opposition by the FHFA? In a Federal Register notice, the FHFA said that any program to use eminent domain to revise financial contracts could result in losses, which would ultimately be borne by the taxpayers.
Not to mention the possibility (actually, we already did) that such programs “could undermine and have a chilling effect on the extension of credit to borrowers seeking to become homeowners and on investors that support the housing market”, a concern shared with many others. Further, the FHFA, like many other naysayers, has raised questions about the efficacy (and more fatally, the legality) of such proposals, including, whether such proposals are constitutional, the application of federal and state consumer protection laws, the effects on holders of existing securities, the impact on millions of negotiated and performing mortgage contracts (query whether owners of homes that are underwater would realistically seek out such “protections” to improve their financial situations), the role of courts in administering and overseeing such programs, and the issues surrounding valuation.
Just a week after Edward DeMarco, acting director of the FHFA, definitively said “no” to principal reductions on loans owned or guaranteed by the GSEs, a tool that private banks and mortgage holders have used with increasing frequency, he has said that action may be taken to block the use of eminent domain to seize mortgages backing securities. In the Federal Register notice, the FHFA warns that it has determined that action may be necessary on its part, as conservator of the GSEs, to avoid a risk to safe and sound operations at its regulated entities and to avoid taxpayer expense. Interestingly, the FHFA didn’t detail what “action” is contemplated in its Federal Register notice but is seeking public comment (which I can’t wait to read!).
It isn’t difficult, however, to guess that FHFA, as conservator of Fannie and Freddie, may require that the GSEs refuse to guaranty mortgages in areas employing the eminent domain plan (a concern raised by Scott Simon of PIMCO). One cannot downplay the effect of this potential risk to homeowners and prospective borrowers in affected communities.
In the coming weeks, as the next meeting of the San Bernardino Joint Powers Authority is held, public hearings on this issue take place (at least in Chicago) and others come out publicly for and (more likely) against, the eminent domain proposals, the fate of the proposal will likely be decided. Stay tuned to CrunchedCredit for the latest developments.