Ballard Spahr: FHFA Questions Use of Eminent Domain for Underwater Mortgages

Ballard Spahr: FHFA Questions Use of Eminent Domain for Underwater Mortgages

by the Consumer Financial Services Group

In response to threats from local governments in California and elsewhere to use eminent domain to acquire and restructure underwater mortgages, the Federal Housing Finance Agency (FHFA) has announced that it "has determined that action may be necessary on its part...to avoid a risk to safe and sound operations and to avoid taxpayer expense."

The FHFA is the regulator and conservator of Fannie Mae and Freddie Mac and the regulator of the Federal Home Loan Banks (FHLBs). In its notice published in the Federal Register on August 9, 2012, the FHFA stated that it "has significant concerns about the use of eminent domain to revise existing financial contracts and the alteration of the value of [securities held by Fannie Mae, Freddie Mac and the FHLBs.]" 

According to the FHFA, the use of eminent domain could result in losses to Fannie Mae and Freddie Mac that "would represent a cost ultimately borne by taxpayers" and "could undermine and have a chilling effect on the extension of credit to borrowers seeking to become homeowners and on investors that support the housing market." 

In the notice, the FHFA requests input on various questions raised by the use of eminent domain, such as the constitutionality of such use, its effect on holders of existing securities, the impact on performing mortgages, and the role of the courts in administering or overseeing an eminent domain program. Input will be accepted "from any person with views on this subject" through September 7, 2012, "as the agency moves forward with its deliberations on appropriate action."

The FHFA's notice follows closely on the heels of its July 31, 2012, letter to members of Congress and a related paper explaining the FHFA's decision not to allow Fannie Mae and Freddie Mae to participate in the Home Affordable Modification Program's Principal Reduction Alternative. In the FHFA's view, the principal forgiveness contemplated by the program "would not make a meaningful improvement in reducing foreclosures in a cost effective way for taxpayers."

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs). The group includes the firm's Mortgage Banking Group, which combines broad regulatory experience assisting clients in both the residential and commercial mortgage industries with formidable skill in litigation and depth in enforcement actions and transactions.

The CFS Group also produces the CFPB Monitor, a blog that focuses exclusively on important Consumer Financial Protection Bureau developments. To subscribe to the blog, use the link provided on the right.

For more information, please contact CFS Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com; CFS Practice Leader Jeremy T. Rosenblum at 215.864.8505 or rosenblum@ballardspahr.com; Mortgage Banking Practice Leader Michael S. Waldron at 202.661.2234 or waldronm@ballardspahr.com; or Mortgage Banking Practice Leader Richard J. Andreano, Jr., at 202.661.2271 or andreanor@ballardspahr.com.

Copyright © 2011 by Ballard Spahr LLP  (No claim to original U.S. government material.)

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

For more information about LexisNexis products and solutions connect with us through our corporate site.