Mortgage Associations Fight Unusual Plan to Save Homes

Associations in the mortgage and real estate industries strongly and vocally oppose Richmond, California's idea to use eminent domain to seize properties with underwater mortgages.

Home prices are on the rise, and headline writers across the country couldn’t be more ecstatic: “Housing Market Heats Up,” “Firing on Most Cylinders,” “Housing Market Roars to Life.”

Those reports might seem foreign in parts of the country where the housing market has been slower to recover. Local leaders in some of those communities, tired of waiting for their towns to catch up, are considering a drastic approach to help people keep their homes, and that has associations in the mortgage industry gearing up for a fight.

The plan

In the working-class city of Richmond, California, about half of all homeowners with mortgages are underwater. The city plans to use its power of eminent domain to seize some of those loans and allow homeowners to keep their homes, a strategy being considered by two dozen other cities, including Seattle and North Las Vegas. Eminent domain is typically used to force the sale of homes to clear way for public works projects such as new highways or schools.

Earlier this week, Richmond sent letters to homeowners and lenders offering to buy 624 underwater loans, according to Bloomberg. It would buy the homes for 80 percent of their current market value, Reuters reports, write the mortgages down, and help the homeowners refinance at the new amount. The homeowners would go from owing more than the house is worth to having some equity. But if the lenders won’t cooperate, the city could use eminent domain to seize the loans, an unprecedented use of the legal doctrine.

The opposition

Banks and the real estate industry argue that using eminent domain to seize properties with underwater mortgages is unconstitutional and warn of lengthy, costly lawsuits.  A group of 22 organizations, including the Securities Industry and Financial Markets Association, the California Mortgage Association, and the Mortgage Bankers Association has sent a letter discouraging one California city from the practice [PDF].

The letter states, “Under the Fifth Amendment of the U.S. Constitution and California law, eminent domain powers can only be exercised when the proposed taking is for a public use or benefit and when just compensation has been provided to the former owner of the property.” If the amount paid for the mortgages is below face value, just compensation is not provided, the groups claim in the letter.

Those same associations are pressuring Fannie Mae, Freddie Mac, and the Federal Housing Administration to ban the practice, according to a report in The New York Times. They also warn that any city using eminent domain would make borrowing more expensive for others in the community.  And Representative John Campbell (R-California) has introduced a House bill that would prohibit Fannie and Freddie from guaranteeing mortgages in municipalities that try going that route.

Other communities that were considering the practice, such as California’s San Bernardino County,  already have dropped the idea, which could be considered a clear signal of the strength of those associations.


Chris Brandon

By Chris Brandon

Christopher Brandon is a contributor to Associations Now. MORE

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