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Federal Legislation Attacks Eminent Domain

Bill introduced in House by Rep. Campbell

Sept. 13, 2012

By staff

Federal legislation has been introduced that would eliminate government and agency financing in housing markets where local municipalities use eminent domain to seize mortgages.

Rep. John Campbell (R-Calif.) Thursday introduced the Defending American Taxpayers from Abusive Government Takings Act into the House.

The bill would prohibit Fannie Mae and Freddie Mac from guaranteeing or purchasing loans secured by residential properties that are in areas where loans are being seized using the power of eminent domain.

In addition, the proposed law would stop the Federal Housing Administration from insuring loans backed by properties in localities that adopt the strategy and not allow the Department of Veterans Affairs to guarantee impacted mortgages.

The San Bernardino County Board of Supervisors joined the cities of Ontario and Fontana in creating a joint powers authority to consider an eminent domain plan in June. The proposal from Mortgage Resolution Partners would have the local governments targeting negative-equity mortgages included in private-label MBS for seizure and loan modifications.

On his congressional website, Campbell says in one post that the eminent domain proposal "is banana republic-type stuff."

The legislator warns that the proposal would subdue investment in the mortgage market.

"The whole basis of commerce in the United States is that you make transactions, you make contracts under the law and that you can count on those laws as the contracts go forward," Campbell stated. "Here you're basically going to void them."

Campbell has the support of the Mortgage Bankers Association.

"While the problem of underwater borrowers continues to slow the housing recovery, using eminent domain to take those mortgages is not a responsible answer," said MBA President and Chief Executive Officer David H. Stevens in a statement. "Beyond the obvious legal issues of using eminent domain in such a radical way, the government seizing mortgages would set a precedent that will hurt those communities and borrowers it is most designed to help."

Stevens, who served as Federal Housing Commissioner in the Obama administration, explained that increasing legal uncertainty for mortgage lenders and investors will increase the cost of lending and curtail credit availability.

He cautions that in addition to increasing home financing costs, the use of the controversial tactic will cause "a spiraling effect of declining home values and threatening local economic recovery."

Millions of American's would be impacted from eminent domain, according to Stevens, because their investments including pension plans, 529 college savings accounts and 401(k) are tied up in MBS that would be affected from "cramming losses down" on current MBS holders.

"Congressman Campbell's bill, on top of limiting the future cost to taxpayers associated with the losses that would be incurred by Fannie Mae, Freddie Mac, FHA and the VA, sends a clear message to municipalities considering eminent domain -- if you do this, there will be consequences for your constituents, consequences that will severely impact not only potential home buyers and home owners, but the value of every home in your area," Stevens said in the statement.

California Lt. Gov. Gavin Newsom is trying to create consequences for members of the mortgage industry and federal agencies who try to thwart the eminent domain proposal. He is asking the U.S. Department of Justice to review the actions of the lending community.

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