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Wall Street warns against using eminent domain to seize underwater mortgages
Heavy hitters in the financial industry are lining up against a new idea brewing among local government officials to help struggling homeowners by seizing control of their mortgages through eminent domain.
With many areas of the country still digging out from the housing crisis, some local governments are considering taking on the underwater mortgages at a substantially lower price, thus making them more affordable for the borrower.
With policymakers at the federal, state and local level struggling to find a way to relieve the burden of unaffordable home loans, the eminent domain idea is being met with open ears.
“This is just completely against what is the national interest in terms of mortgage finance,” said Chris Killian, a managing director for the Securities Industry and Financial Markets Association (SIFMA). “It’s just completely wrong in our view.”
Joseph Pigg, vice president and senior counsel in mortgage finance for the American Bankers Association, said the idea could have “devastating” consequences.
“If they were to exercise eminent domain, you’re going to just completely destroy the securitization market,” he said.
The idea is the brainchild of a private company, Mortgage Resolution Partners, which would receive a flat fee for each loan it helps a government identify and buy.
Although the housing sector has shown some life recently, the market has been a drag on the economy and a detriment to the economy since the bubble burst in 2007.
Consumer and community groups have pleaded with lawmakers and regulators for initiatives that would relieve the burden of underwater homeowners. And using the power of eminent domain to seize underwater mortgages could give governments the chance to provide direct relief.
The county of San Bernardino, Calif., is studying the idea, as is the county of Suffolk, N.Y.
But the industry views it as an affront to the nature of capital markets, as the plan would require private holders to absorb substantial losses on mortgage-backed securities.
If the plan gains legs, Killian said, mortgage lenders are going to be that much more careful about extending mortgages, lest their value be reduced by the government if homeowners get into trouble.
“Lenders are going to react and underwrite defensively to protect themselves,” he said.
Industry efforts to throw cold water on the idea have gotten a boost from two separate sources.
Financial firms were quick to trumpet a statement released earlier this month by the Federal Housing Finance Agency (FHFA), which oversees mortgage giants Fannie Mae and Freddie Mac. In it, the regulator said it had “significant concerns” about the proposals, and that it would consider taking action of some sort to block the initiatives if necessary.
“We were glad to see the FHFA do this because ... this needs to be raised up to the federal level,” said Pigg.
And on Tuesday, Chicago Mayor Rahm Emanuel said he did not support the idea either, after it was discussed at a city committee hearing.
“The idea of using eminent domain is not one I support ... because I don't think it's the right way to address the problem," he said, according to Crain’s Chicago Business.
"I don't think it is the power of the city to deal with the housing issue. We have a national issue. I think we have to address the issue. I just don't think that is the right instrument."
While the idea might still just be percolating at the local level, the conversation could soon make its way to Washington. Rep. Gregory Meeks (D-N.Y.) asked Treasury Secretary Timothy Geithner about the idea in July, at an unrelated hearing held by the House Financial Services Committee.
Geithner said his team was “carefully looking” into the idea. But at the same time, he cautioned that it comes with a lot of “complicated legal and policy questions,” adding that there are a “broad range of tools” available to help struggling homeowners.
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