FHFA raises concerns about eminent domain plan

NEW YORK (Reuters) - The Federal Housing Finance Agency raised concerns on Wednesday about a private investor group’s controversial aim to seize and restructure poor-performing mortgages.

The agency, which oversees Fannie Mae and Freddie Mac, said it has “significant concerns” about the use of eminent domain to condemn and restructure mortgages. The federal housing regulator said it is concerned about the program’s constitutionality.

“FHFA has significant concerns with programs that 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,” the agency said in a statement.

It also questioned the plan’s potential cost to taxpayers and the impact it could have on mortgage contracts.

Edward DeMarco, the acting director of the FHFA, has objected to principal reductions on mortgages and told reporters on July 31 that “the anticipated benefits do not outweigh the costs and risks.”

The idea of condemning distressed mortgages to provide financial relief to cash-strapped homeowners is being pushed by Mortgage Resolution Partners, a San Francisco-based group backed by some prominent West Coast financiers.

Eminent domain traditionally has been used by local governments to condemn buildings and properties for public works projects.

Some public officials in San Bernardino County in California are considering using eminent domain to restructure distressed mortgages held in private mortgage-backed securities.

No one is currently proposing using eminent domain on mortgage-backed securities sold by Fannie or Freddie. But the FHFA issued Wednesday’s statement because Fannie and Freddie guarantee the overwhelming majority of U.S. mortgages.

In a response to the FHFA statement, Mortgage Resolution Partners issued its own statement defending the proposal and its constitutionality.

“The use of eminent domain to purchase mortgage loans from private label securitization trusts is constitutional,” said Steven Gluckstern, the group’s chairman.

“We expect that the FHFA will, after due consideration, respect state and local sovereign powers of eminent domain over private property within their jurisdictions,” he added.

Another key player, the Securities Industry and Financial Markets Association, echoed the FHFA criticisms.

“SIFMA believes that this plan would likely significantly harm mortgage finance markets and reduce access to credit for mortgage borrowers,” said Kenneth E. Bentsen Jr., executive vice president for public policy and advocacy for SIFMA.

California Lieutenant Governor Gavin Newsom has backed Mortgage Resolution Partners’ plan, saying, “this may be an aggressive idea, but communities such as San Bernardino, Chicago and others have no choice in these desperate times.”

SIFMA’s criticism follows Newsom’s call to the association to “cease making threats to the local officials of San Bernardino County” on July 27.

A rising chorus of mortgage investors are boycotting the plan, which is also being considered in Berkeley, California, and Chicago.

“We think it’s a disastrous idea and would be a horrible precedent for the market,” Stephen Walsh, chief investment officer of Western Asset Management Co, told Reuters in an interview on Tuesday.

“What might bring isolated benefit to a particular city across the board could be very negative for housing financing going forward in the United States,” he said.

Reporting by Sam Forgione; Editing by Matthew Goldstein, Jennifer Ablan and Dan Grebler