Under several of the proposed plans, including those advanced by Mortgage Resolution Partners (MRP), a city or county would condemn and seize certain mortgages held in private-label securitizations under the power of eminent domain and refinance the seized mortgage through a government lending program.
In August 2013, the Federal Housing Finance Agency (FHFA) published a notice explaining its “serious concerns on the use of eminent domain to restructure existing financial contracts and has determined such use presents a clear threat to the safe and sound operations of Fannie Mae, Freddie Mac and the Federal Home Loan Banks.” FHFA, the regulator for these entities, noted it may take steps in response to an eminent domain action to restructure mortgage loans, including initiating legal challenges.
In December 2014, President Obama signed into law the Fiscal Year 2015 Omnibus Appropriations bill. The legislation includes an eminent domain provision restricting the involvement of the Federal Housing Administration (FHA), the Government National Mortgage Administration (GNMA), or the Department of Housing and Urban Development (HUD) in such an eminent domain scheme:
“None of the funds made available in this Act shall be used by the Federal Housing Administration, the Government National Mortgage Administration, or the Department of Housing and Urban Development to insure, securitize, or establish a Federal guarantee of any mortgage or mortgage backed security that refinances or otherwise replaces a mortgage that has been subject to eminent domain condemnation or seizure, by a state, municipality, or any other political subdivision of a state.”
SIFMA recognizes the significant difficulties municipalities face in their recovering housing market and economy, but strongly objects to any proposed use of eminent domain to seize mortgage loans from securitizations. This misuse of eminent domain would to harm the very borrowers and communities it seeks to help as well as the mutual and pension funds invested in these securitizations. There are better alternatives to address these problems.
SIFMA believes that the contemplated use of eminent domain raises very serious legal and constitutional issues, including a violation of the Contract Clause and an impermissible “taking” of private property under the U.S. Constitution and various State Constitutions. Additionally, SIFMA believes the plan would be immensely destructive to U.S. mortgage markets by undermining existing securitization transactions and consequently making investing in and funding mortgage credit creation less attractive.