The use of eminent domain by local governments to restructure performing mortgages could create losses for the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. and become an expense borne by U.S. taxpayers, according to the regulator of the government-sponsored enterprises. It could also have a “chilling effect” on the mortgage market. So steps are being taken to minimize the fallout.
The Federal Housing Finance Agency has filed a public notice seeking input about its concern over proposals to utilize eminent domain to restructure existing financial contracts. FHFA is concerned about how the value of securities owned by Fannie Mae and Freddie Mac will be impacted.
Fannie and Freddie were both seized in September 2008 and placed into conservatorship with the FHFA as their conservator. FHFA is responsible for preserving and conserving their assets and minimizing costs to taxpayers.
FHFA is additionally concerned about the impact that eminent domain restructurings would have on the Federal Home Loan Banks, which it also regulates. The banks hold mortgage-backed securities and accept mortgages as collateral for advances to member banks.
The regulator warned that the impact from eminent domain could have “a chilling effect” on mortgage finance both for borrowers and investors.
“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,” a statement Wednesday from the regulator said. “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.”
FHFA wants input on whether the proposed use of eminent domain is even constitutional. It also wants to understand how the application of consumer protection laws will apply.
In addition, the regulator is seeking comments about the impact on millions of negotiated and performing mortgage contracts, the role of courts in administering and overseeing such a program, and what judicial resources and expenses will be available.
Most importantly, FHFA wants to understand “critical issues surrounding the valuation by local governments of complex contractual arrangements that are traded in national and international markets.”
As FHFA moves forward with its deliberations on the appropriate action to take, it is accepting comments by e-mail at [email protected] until Sept. 7.
