Ed DeMarco is really feeling his oats, no doubt thanks to projections of profits at Fannie and Freddie paradoxically spurred by a housing shortage. (Those profits are at least partially derived from Fannie and Freddie evading local government transfer taxes, by the way, not DeMarco’s “responsible stewardship.”) He rejected principal reductions as a means to solve the foreclosure crisis. And now, he’s going after another potential solution floated by some local governments: eminent domain. FHFA sent a notice to the Federal Register indicating “concern” with the use of eminent domain to reset home loans. The short notice is available here:
FHFA has significant concerns about the use of eminent domain to revise existing financial contracts and the alteration of the value of Enterprise or Bank securities holdings. In the case of the Enterprises, resulting losses from such a program would represent a cost ultimately borne by taxpayers. At the same time, 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.
FHFA has determined that action may be necessary on its part as conservator for the Enterprises and as regulator for the Banks to avoid a risk to safe and sound operations and to avoid taxpayer expense.
Among questions raised regarding the proposed use of eminent domain are the constitutionality of such use; the application of federal and state consumer protection laws; the effects on holders of existing securities; the impact on millions of negotiated and performing mortgage contracts; the role of courts in administering or overseeing such a program, including available judicial resources; fees and costs attendant to such programs; and, in particular, critical issues surrounding the valuation by local governments of complex contractual arrangements that are traded in national and international markets.
I have concerns about eminent domain as it may be practiced in San Bernardino County (particularly as it relates to valuation, which DeMarco cites). I do think it has the potential to help borrowers and re-allocate losses from the housing bubble in the proper form, so that they all don’t fall on the borrower. That’s especially true if other cities and counties besides San Bernardino (who is at the deliberation stage) pick up the practice; Berkeley, California is considering it.
DeMarco is protecting his institution, and that’s fine. What’s not fine, and not true, is his dubious claim about constitutionality (eminent domain, under clear rules, is in the Constitution). Moreover, this is a local issue where FHFA really has no role. Their ominous language about how “action may be necessary” is kind of chilling, and resembles SIFMA’s big threat to stop lending to localities that pursue eminent domain. But ultimately it’s pretty hollow. If a local government has the means to purchase the loans, they have clear constitutional authority under eminent domain laws to purchase mortgages at a fair market rate for a public purpose. FHFA can howl about it all they want.
FHFA wants input about this over the next months. “Communications may be addressed to FHFA OGC, 400 Seventh Street SW., Eighth Floor, Washington, DC 20024, or emailed to FHFA OGC at eminentdomainOGC@fhfa.gov.” So you know what to do.