FHFA Questions Use of Eminent Domain for Underwater Mortgages

by Ballard Spahr LLP
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In response to threats from local governments in California and elsewhere to use eminent domain to acquire and restructure underwater mortgages, the Federal Housing Finance Agency (FHFA) has announced that it "has determined that action may be necessary on its part… to avoid a risk to safe and sound operations and to avoid taxpayer expense."

The FHFA is the regulator and conservator of Fannie Mae and Freddie Mac and the regulator of the Federal Home Loan Banks (FHLBs). In its notice published in the Federal Register on August 9, 2012, the FHFA stated that it "has significant concerns about the use of eminent domain to revise existing financial contracts and the alteration of the value of [securities held by Fannie Mae, Freddie Mac and the FHLBs.]" 

According to the FHFA, the use of eminent domain could result in losses to Fannie Mae and Freddie Mac that "would represent a cost ultimately borne by taxpayers" and "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." 

In the notice, the FHFA requests input on various questions raised by the use of eminent domain, such as the constitutionality of such use, its effect on holders of existing securities, the impact on performing mortgages, and the role of the courts in administering or overseeing an eminent domain program. Input will be accepted "from any person with views on this subject" through September 7, 2012, "as the agency moves forward with its deliberations on appropriate action."

The FHFA's notice follows closely on the heels of its July 31, 2012, letter to members of Congress and a related paper explaining the FHFA's decision not to allow Fannie Mae and Freddie Mae to participate in the Home Affordable Modification Program's Principal Reduction Alternative. In the FHFA's view, the principal forgiveness contemplated by the program "would not make a meaningful improvement in reducing foreclosures in a cost effective way for taxpayers."

Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs). The group includes the firm’s Mortgage Banking Group, which combines broad regulatory experience assisting clients in both the residential and commercial mortgage industries with formidable skill in litigation and depth in enforcement actions and transactions.

The CFS Group also produces the CFPB Monitor, a blog that focuses exclusively on important Consumer Financial Protection Bureau developments. To subscribe to the blog, use the link provided on the right.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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