In a letter to lawmakers, the Department of Housing and Urban Development expressed concern about the use of eminent domain by local governments to seize performing loans held in residential mortgage-backed securities to reduce the outstanding balances. But the agency said it is too early to determine whether loans modified through the eminent domain process can be insured by the Federal Housing Administration.
Among the U.S. cities that are considering using the strategy are North Las Vegas, Nev., and the California towns of Pomona and Richmond.
Richmond, which is proceeding with the plan, has already begun sending letters to MBS investors making deeply discounted offers on hundreds of loans, many which are performing.
HUD’s letter was addressed to three House Republicans from California — Reps. Edward R. Royce, Gary G. Miller and John B. Campbell.
Miller’s district includes Richmond.
The letter, which was signed by HUD Acting Assistant Secretary for Congressional and Intergovernmental Relations Elliot M. Mincberg, was written in response to a June 11 letter from the congressmen to HUD Secretary Shaun Donovan. The legislators had expressed concerns about how the scheme could harm the recovery as well as the growth of private capital in the mortgage market.
Mincberg highlighted prior HUD testimony about its concern over the proposed use of eminent domain by municipalities.
He said that the notion of using eminent domain to condemn and refinance mortgages raises “a number of potential and novel issues that state and local governments and the courts will have to consider and resolve.” Those issues include the development of a condemnation and compensation plan that will survive legal scrutiny based on state laws, federal laws and legal precedent as well as political scrutiny
HUD acknowledged Richmond’s progress and the subsequent investor lawsuits that have been filed.
The letter said that HUD doesn’t know if a new mortgage created through the eminent domain process would be insurable by FHA.
“Moreover, until such plans produce concrete, analyzable results, HUD will not know what if any effects they will have on FHA and the mortgage market,” the letter stated. “Any guidance from FHA on the issue should take into account these factors and should be narrowly tailored to avoid any unintended consequences.”
HUD said that any response from FHA would best be delivered only after more information is available about the use of eminent domain.