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In reaction to proposals floated in numerous municipalities to use eminent domain to seize underwater mortgages, Rep. John Campbell, R-Calif., has reintroduced the Defending American Taxpayers From Abusive Government Takings Act, which was originally introduced in September 2012.

The bill would, in effect, preclude cities and towns from using eminent domain as a tool for keeping homeowners out of foreclosure. Chicago, Stockton, Calif., and Brockton, Mass., are examples of cities that have proposed such laws.

Although the proposals differ slightly from one another, the general idea is the same: The city would purchase the loans from securitized mortgage pools, compensating the investors at the current market value of the collateral properties. The loans would then be restructured to bring them out of negative equity and resold on the secondary market.

Rep. Campbell's proposal would amend the Federal National Mortgage Association Act and the Federal Home Loan Mortgage Corporation Act to prohibit Fannie Mae and Freddie Mac from purchasing any mortgage secured by eminent domain within the preceding 120 months. In addition, it would amend the National Housing Act to prohibit the Secretary of the Department of Housing and Urban Development from insuring or guaranteeing any loans in counties where such eminent domain laws are in effect.

"Using eminent domain to seize mortgages is not only legally questionable," said Rep. Campbell in a statement, "it represents a complete abrogation of private property rights.

"The federal government and the American taxpayer would be forced to bear all the risk in the event of a failure," he said. "Further, 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. 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."

Although the local eminent domain proposals promulgated thus far would not involve the use of taxpayer money, they nevertheless have faced strong opposition from Wall Street investment firms and the Federal Housing Finance Agency, which have cited dangers in the practice of "taking" real property in order to get it refinanced.

Indeed, such proposals faced strong backlash from various inudstry groups when introduced last year.

However, an article recently published by economist Robert Hockett, a visiting Cornell Law School professor at the Federal Reserve Bank of New York, advocates the use of eminent domain as a tool to bail out underwater homeowners. (Click here to read Hockett's article.)

In a statement, David H. Stevens, president and CEO of the Mortgage Bankers Association, commended Campbell for reintroducing the bill.

"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 said "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."

In a statement on LinkedIn, Stevens said such laws will really only benefit investors, not the communities in which they are enacted.

The problem, he said, is that government-sponsored enterprises Fannie Mae and Freddie Mac would likely no longer do business in communities that adopt such laws, in effect driving away potential home buyers.

"In what some have said is simply a pursuit from greedy investors, community governments may be duped into supporting this concept and may face the harshest penalty as a result," Stevens said. "Families may be forced to buy homes elsewhere because mortgages are either too costly or not available in the few communities who adopt these measures."


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