HUD Says It’s Unclear If FHA Can Back Loans Issued After Seizure

The U.S. Department of Housing and Urban Development told lawmakers it couldn’t say if the Federal Housing Administration would insure new mortgages in communities including Richmond, California that propose to seize home loans through eminent domain.

“Pending legal developments and possible further execution of the plans in question, HUD does not know whether any new mortgages which might be created would qualify for insurance by the Federal Housing Administration,” Acting Assistant Secretary Elliot Mincberg wrote in an Aug. 12 letter responding to questions from members of Congress.

HUD’s comments came the week after the FHFA, which oversees Fannie Mae (FNMA) and Freddie Mac, said it would considering directing the companies to stop doing business in communities that seize mortgages through eminent domain to avert foreclosure by writing down the principal balances.

The Federal Housing Finance Agency may also initiate legal challenges to such actions, Alfred M. Pollard, the agency’s general counsel, said in a memorandum.

“There is a rational basis to conclude that the use of eminent domain by localities to restructure loans for borrowers that are ‘underwater’ on their mortgages presents a clear threat to the safe and sound operations of Fannie Mae, Freddie Mac and the Federal Home Loan Banks as provided in federal law,” Pollard wrote.

Blight Prevention

Richmond announced last month it is moving ahead with a plan to seize mortgages. The public benefit of the seizures is to fend off foreclosures that cause blight and create other costs for the community, according to the plan’s supporters.

At least a dozen cities still dealing with the fallout of worst slump in home prices since the Great Depression are studying the eminent domain idea. Others include El Monte, California, North Las Vegas, Nevada, and Irvington, New Jersey. Communities such as San Bernardino County, California, and Chicago abandoned such plans after considering them last year.

Fannie Mae and Freddie Mac last week joined investors authorizing a lawsuit to stop Richmond from seizing loans.

The eminent domain program is advocated by Mortgage Resolution Partners LLC, which would provide services and arrange for private investment funds that would profit by buying the loans for less than property values, and reworking them.

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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