Prohibiting Eminent Domain Mortgage Seizures

MBA opposes local government efforts to use eminent domain to seize from investors "underwater" (negative equity) mortgages in their communities, in order to write down the principal balances and restore borrower equity.

Overview:

  • Under this unprecedented and constitutionally questionable use of local eminent domain powers, homeowners would remain in their homes while their mortgage balances would be "crammed-down," refinanced and resold to new investors.
  • Proponents of this proposal argue it is a tool to help borrowers whose homes are worth less than their principal balance as a result of the housing market correction.
  • Investor groups argue that this proposal is an illegal "taking" of an asset from the original holder (banks, mortgage-backed securities (MBS) holders, etc.).
  • The Federal Housing Finance Agency has stated that the proposal presents a clear threat to the safe and sound operations of Fannie Mae and Freddie Mac (the GSEs) and the Federal Home Loan Banks.
  • Industry believes the proposal would harm consumers by increasing mortgage credit costs and limiting credit availability for new mortgages in adopting communities.  
  • In recent years, MBA and its sister trade groups defeated specific proposals in San Bernardino County, California; Brockton, Massachusetts; and North Las Vegas, Nevada and have discouraged many other communities from considering similar proposals.
  • Lawsuits by investors were previously filed in response to Richmond, California's position as the lead prospect for enacting the proposal, and would undoubtedly be refiled upon an actual taking.
  • The California Public Employees' Retirement System (CALPERS) has stated that it has concerns about the proposal undermining the value of its holdings as the nation's largest public pension fund.

Impact:

  • By shifting the risk of home price declines from homebuyers to lenders/investors, this proposal would harm any community that uses eminent domain powers to seize mortgages.
  • Lenders would be forced to price this risk through higher interest rates, mitigate it through sharply higher down-payment requirements, or a combination of both actions.
  • Punitive relief provided to a small number of underwater homeowners would be offset by higher rates and reduced access to credit for prospective homebuyers in the community. 
  • Any local government implementing the proposal would incur millions in unbudgeted litigation costs, a result that would have a direct, negative impact on taxpayers.
  • Retirement investments of public employees-which include private-label MBS-would be drastically reduced.

MBA's Position / Next Steps:

  • MBA strongly opposes the use of eminent domain to seize underwater mortgages because:
    • It is a constitutionally questionable use of eminent domain powers;
    • It dramatically alters the typical mortgage transaction by shifting the risk of home price declines (but not the benefits of price increases) to the lender/investor; and
    • The benefits would be limited to a small number of underwater borrowers, while the costs would be imposed on all future home buying activity in the community. 
  • MBA encourages its member companies, state and local mortgage associations and industry partners to remain vigilant to these local government proposals and to strongly oppose their consideration throughout the nation.
  • H.R. 2029-the Consolidated Appropriations Act, 2016-contained an MBA-supported provision barring the Department of Housing and Urban Development, the Federal Housing Administration, and Ginnie Mae from insuring, securitizing or establishing a federal guarantee in Fiscal Year (FY) 2016 for mortgage loans seized through the power of eminent domain by a state, municipality or any other political subdivision of a state (Public Law No: 114-113). The provision blocked this proposal's most viable refinancing options through September 30, 2016.
  • In September 2016, Congress passed (and President Obama signed into law) a Continuing Resolution (CR) that averted a partial government shutdown-keeping federal programs funded through December 9, 2016. The CR preserves FY 2016's eminent domain prohibition through this December date.
  • MBA urges Congress to continue this prohibition in FY 2017, which is currently included in the Senate and House versions of the FY 2017 Transportation-HUD appropriations bill. The Senate version has been passed by that chamber, and the House version is pending a floor vote when Congress returns from the November 2016 elections for its "Lame Duck" session.
  • Ideally, MBA urges Congress to make this eminent domain prohibition permanent.
  • MBA also urges Congress to prohibit the Department of Veterans Affairs, the Department of Agriculture, and the GSEs from undertaking related actions for loans acquired through this practice.

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