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Cities Weighing Mortgage Seizures Get Washington’s Attention

Photographer: Justin Sullivan/Getty Images

A worker removes furniture from a foreclosed home in Richmond, California. Close

A worker removes furniture from a foreclosed home in Richmond, California.

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Photographer: Justin Sullivan/Getty Images

A worker removes furniture from a foreclosed home in Richmond, California.

U.S. regulators and lawmakers are seeking ways to keep local governments from using the power of eminent domain to seize mortgages, citing concern about the potential cost to taxpayers, investors and homebuyers.

The issue, the subject of a Mortgage Bankers Association symposium today, has gained attention in Washington after the city of Chicago and California’s San Bernardino County said they would consider confiscating home loans and cutting borrowers’ debt. No community has taken the step so far.

“What investors in their right mind would invest in a community that allows arbitrary writedowns of negative equity?” MBA president and chief executive officer David Stevens said at the symposium. “That lack of investor capital will have a direct and profound impact on future homebuyers in those communities, preventing a recovery of the housing market.”

The federal government is positioned to wield broad power in the debate because it owns or guarantees 90 percent of U.S. mortgages through government-sponsored enterprises and the Federal Housing Administration.

“We have to answer the question, is there a federal interest here?” Alfred Pollard, general counsel of the Federal Housing Finance Agency, regulator of Fannie Mae and Freddie Mac, said at the symposium. “I can tell you the answer is yes, there is a federal interest here.”

FHFA Effort

Pollard is leading an effort by the FHFA to determine whether Fannie Mae and Freddie Mac should intervene to discourage loan confiscations. In addition, a bill introduced last week by Representative John Campbell, a California Republican, would bar Fannie Mae, Freddie Mac, the Veterans Administration and the FHA from guaranteeing or buying loans in communities that seize mortgages.

The plan is “ridiculous,” Campbell said today. “To say this is a legitimate use of eminent domain is laughable.”

Local governments, whose tax bases are being eroded by foreclosures in the wake of the mortgage crisis, say they are being forced to act because lenders and federal officials have failed to find solutions for troubled borrowers. The city of San Bernardino, in San Bernardino County, declared bankruptcy last month.

Resolution Partners

San Bernardino County and two of its cities, Fontana and Hesperia, are weighing a plan advocated by San Francisco-based Mortgage Resolution Partners LLC, which may profit from managing aspects of it. Chicago’s city council held hearings on the issue last month.

Under the Mortgage Resolution Partners plan, lenders would be forced to sell mortgages of borrowers who owe more than their properties are worth so the debt could be reduced and refinanced. The plan targets mortgages in so-called non-agency securities, those without guarantees from U.S.-owned Fannie Mae (FNMA), Freddie Mac or Ginnie Mae.

A firm such as Mortgage Resolution Partners, whose website describes it as a “Community Advisory firm working to stabilize local housing markets and economies,” could buy the loans at a discount to the homes’ value and modify them.

Pollard said he is reviewing public input that FHFA solicited last month on what, if anything, the agency should do if communities proceed.

Legal Action

That could include legal action or barring Fannie Mae and Freddie Mac from buying loans in municipalities using eminent domain. The firms, which have been under U.S. conservatorship since September 2008, buy loans and bundle them into securities on which they guarantee payments of principal and interest.

While debt backed by Fannie Mae and Freddie Mac wouldn’t be seized under the Mortgage Resolution Partners plan, the two companies own more than $100 billion of non-agency securities.

Fannie Mae and Freddie Mac have drawn $190 billion in aid from the U.S. Treasury under conservatorship and any profits they make are turned over to taxpayers. Changes in the value of securities they hold could cost the government, FHFA said.

Campbell, whose district is in Southern California, said he opposes bailing out cities that have been spending beyond their means.

Representative Maxine Waters, a California Democrat from Los Angeles, said last week at a Washington panel discussion on the issue that she is “intrigued” by the loan-modification plans, but hesitant because of the past use of eminent domain to force people out their homes.

“In my experience, few policies have done more to dismantle communities than eminent domain,” said Waters, who said she hasn’t taken a position using it to seize mortgages. “These proposals do raise a lot of questions and concerns.”

Gone Nowhere

The fact that cities are taking it upon themselves to cut mortgage principal reflects that federal efforts to cut debt for troubled borrowers have gone nowhere.

Mortgage-backed securities investors were among those who helped thwart congressional efforts in 2009 to allow bankruptcy judges to cut home-loan debt. The FHFA last month rejected a White House plan to pay Fannie Mae and Freddie Mac (FMCC) to agree to reduce the balances on loans they guarantee.

Meanwhile, nearly 11 million U.S. homeowners are underwater, owing more on mortgages than the properties are worth, creating a drag on the economy especially in areas where home prices have dropped the most, according to CoreLogic LLC.

“The private MBS community brought this on itself,” said Julia Gordon, director of housing finance and policy at the Center for American Progress, said in an interview.“Every suggested solution has met with the same objection: This will increase the cost of credit. But if you say no to every solution, eventually someone is going to find one that they can do without your permission.”

To contact the reporter on this story: Clea Benson in Washington at cbenson20@bloomberg.net

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net

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