Mortgage-Seizure Backer Says Taking Delinquent Debt in Program

Fannie Regulator May Seek to Block Eminent Domain Seizures
Local governments led by San Bernardino County in California are weighing the use of eminent domain powers to forcefully buy non-delinquent loans from so-called non-agency securities without guarantees from Fannie Mae, Freddie Mac or Ginnie Mae. Photographer: Jonathan Alcorn/Bloomberg

Mortgage Resolution Partners LLC, the firm pushing municipalities to seize loans for borrowers owing more than their homes’ values, said it would expand its proposed program to include delinquent and defaulted debt.

The company made the pledge today in a comment letter to the overseer of Fannie Mae, Freddie Mac and the Federal Home Loan Banks, after previously saying only performing mortgages should be targeted. The San Francisco-based firm is seeking to profit by providing services to local governments that use their so-called eminent domain powers to force sales of home loans packaged into securities without federal backing.

The Federal Housing Finance Agency, which also heard today from trade groups opposed to the plan, last month sought comments on the idea, saying it may need to take action against it. The initiative is being considered in areas across the U.S. led by San Bernardino County, California. The FHFA said it was concerned that the plan would damage lending markets and the finances of the companies that it oversees by reducing the worth of their bond investments.

“Governments will pay fair value for all loans acquired by eminent domain, as indeed they are required to do by the courts that oversee all eminent domain proceedings,” Mortgage Resolution Partners Chief Executive Officer Graham Williams said in the letter. That means investors in the securities holding the loans won’t be damaged, he said.

The company would use the same methodology for determining valuations for loans being seized via eminent domain that Fannie Mae, Freddie Mac and the Home Loan Banks use in their accounting, he said. Under the firm’s program, the size of the mortgages would then be reduced for homeowners, benefiting communities by reducing foreclosures and vacant properties.

Pimco’s View

Mortgage-bond investors including Pacific Investment Management Co., which runs the world’s largest mutual fund, have said they doubt the company’s assertion that the amounts paid will be fair. They have criticized its proposal for targeting borrowers who are less likely to end up in foreclosure because the homeowners aren’t even delinquent.

A coalition of twenty six trade groups including the American Bankers Association, Investment Company Institute and Securities Industry and Financial Markets Association opposing the plan said today that they “share the concerns expressed by the FHFA” in a comment letter.

The “organizations are united in opposition to the current proposals to use eminent domain in this manner, and are actively working together to advocate against this clear abuse of the sovereign power of eminent domain,” they said.

‘Nuclear Option’

The “nuclear option” for the FHFA to use in opposing the plan would be to shut off new credit from Fannie Mae and Freddie Mac to areas using the strategy, JPMorgan Chase & Co. analyst Brian Ye wrote in a report last month. Mortgage bonds that the companies guarantee finance about two-thirds of new loans. Mortgage Resolution Partners said in its letter that such a step would create “redlining,” when lenders discriminate against borrowers in low-income or minority neighborhoods.

Fannie Mae and Freddie Mac have been supported by injections of capital from taxpayers after being seized by the U.S. in 2008. The 12 Federal Home Loan Banks are government-chartered firms that raise money through joint bond sales at below-market rates because of their perceived U.S. backing, which they then lend to the banks and insurers that own them.

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