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Eminent Domain Bill Re-introduced

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Federal legislation that was introduced nearly a year ago to discourage local governments’ attempts to seize negative-equity loans included in private-label residential mortgage-backed securities has been reintroduced.

The Defending American Taxpayers from Abusive Government Takings Act was originally introduced in the U.S. House of Representatives in September 2012.

The proposed law would amend the charters of Fannie Mae and Freddie Mac to prohibit them from guaranteeing or purchasing loans secured by residential properties located in areas where eminent domain has been used to seize mortgages during the prior 10 years. Fannie and Freddie both hold private-label RMBS in their investment portfolios.

It would also amend the National Housing Act to prevent the Federal Housing Administration from insuring such loans and prohibit the U.S. Department of Agriculture from making loans in such areas.

Rep. John Campbell (R-Calif.), who originally introduced the bill, said last week that he has reintroduced the legislation.

Campbell said the bill would “stop reckless city and county governments from enacting profiteering schemes that seek to cash in on the plight of underwater homeowners through the arbitrary seizure of private home loans.”

The lawmaker explained that overleveraged local governments are considering plans that would override property rights to use federal taxpayer dollars to seize distressed home loans in order to fund unconventional loan modifications.

Campbell noted that American taxpayers would fund the scheme, which would additionally profit Mortgage Resolution Partners — the company peddling the proposal.

“These schemes pose a critical threat to recovery of the housing sector as lenders and investors that a sustainable housing finance system rely on would not have any faith in the durability of contracts,” Campbell said in a news release. “Moreover, the savers and retirees who own these mortgages, many of them through their pension funds and 401(k) accounts, would be exposed to serious losses.”

The congressman warned that such programs would be subject to corruption by cities that are motivated to appraise to property as low as possible in order to maximize their own profits. In addition, private lending would be wiped out in such localities.

The bill awaits the House Committee on Financial Services’ consideration.

Mortgage Bankers Association President and Chief Executive Officer David H. Stevens issued a statement applauding Campbell.

“Using eminent domain to seize mortgages will result in tighter, more expensive credit for potential home buyers and those looking to refinance, driving down home values and threatening local economic recovery,” Stevens stated. “Further, cramming losses down on existing mortgage backed securities holders will drive down the value of millions of Americans’ investments, including pension plans, mutual funds and 401(k) retirement accounts.”

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