UTA Strongly Opposes Use of Eminent Domain By Goverment To Acquire Performing,
Underwater Private Mortgages

Edward DeMarco, FHFA

UTA has responded to a public comment request by The Federal Housing Finance Agency (FHFA) on the use of eminent domain to restructure non-performing loans.   

The standard definition of Eminent Domain is the right of government to take land for public purpose, usually to build or expand public roadways, parks, etc.  However, FHFA is now addressing an issue advocated by several cities exploring using private funds to acquire mortgages that are underwater, refinancing those mortgages and selling the resecuritized loans to private investors.  Under the cities plans, the loans acquired by government authority would be restructured, lowering the amount owed, with the intent of helping the owner keep the home.  A potential expanded definition of ‘eminent domain’ then is to include non-performing loans - the government would be “condemning” a loan.

Edward J. DeMarco is the Acting Director of the Federal Housing Finance Agency (FHFA), the regulator of Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks.

UTA’s comments, drafted by UTA Corporate Counsel Philip M. Adleson, Esq., Adleson, Hess & Kelly, strongly opposed the proposal, noting that “the greatest harm will likely arise from removing performing loans from lenders’ loan portfolios, leaving a larger percentage of non-performing loans on lenders’ books.”

UTA also cosigned an industry coalition letter to FHFA in opposition to the cities’ proposal, while also supporting a detailed legal opinion on the matter prepared by the law firm O’Melveny and Myers, LLP.

In soliciting comments in the Federal Register, FHFA expressed concern with the proposed use of eminent domain laws to seize and restructure underwater mortgages.  “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 agency said in a press 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."

California Congressman John Campbell (R-CA) has introduced a bill in Congress that would prohibit the government from using eminent domain with respect to mortgages while California Lt. Governor, Gavin Newsom has requested an investigation by the Justice Department into statements made by groups that have argued that use of eminent domain will increase costs.

Read UTA’s comments to  FHFA on Eminent Domain

Read Industry Coalition Comments to FHFA

Read Legal Opinion from O’Melveny and Meyers, LLP

Read Housing Wire article on legislation to prohibit eminent domain use to restructure loans

Read Los Angeles Times article on Lt. Governor Newsom’s Request