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Concerned about the potential impact that eminent domain proceedings - more specifically, the widespread seizure of mortgages - could have on government-sponsored enterprises Fannie Mae and Freddie Mac, the Federal Housing Finance Agency (FHFA) has issued a statement vowing to fight local, county and state eminent domain proceedings in court and threatening cut off involved municipalities from access to Fannie and Freddie loans should they choose to pursue the eminent domain option.

The issuance of the memorandum follows a public hearing period during which the FHFA solicited comments on "The Use of Eminent Domain to Restructure Performing Loans." Municipalities including Richmond Calif., Chicago, and Brockton, Mass., are considering or are in the process of implementing proposals to use their power of eminent domain to gain control of underwater mortgages. The loans would be adjusted and resold to investors, with taxpayer money used to compensate the difference, in an effort to bail out homeowners who might otherwise go into default.

As the conservator of Freddie Mac and Fannie Mae, as well as the Federal Home Loan Banks, the FHFA is concerned that widespread seizures of the loans and their subsequent refinancing would diminish asset values.

In its memorandum, the FHFA explains that it "continues to have serious concerns on the use of eminent domain to restructure existing financial contracts and has determined such use presents a clear threat to the safe and sound operations of Fannie Mae, Freddie Mac and the Federal Home Loan Banks."

"This use of eminent domain also runs contrary to the goals set forth by Congress for the operation of the conservatorships by FHFA," the agency wrote in its statement.  "Therefore, FHFA considers the use of eminent domain in a fashion that restructures loans held by or supporting pools guaranteed or purchased by FHFA-regulated entities a matter that may require use of its statutory authorities."

In response to the actions on the part of the aforementioned municipalities, the FHFA states that it may consider initiating legal action against any municipality, county or state which "sanctions the use of eminent domain to restructure mortgage loan contracts that affect FHFA’s regulated entities." What's more, the agency says it will "limit, restrict or cease (GSE and FHLB) business activities within the jurisdiction of any state or local authority employing eminent domain to restructure mortgage loan contracts."

Of the approximately 75 comments the agency recorded during the testimony gathering process, about half were from proponents of the use of eminent domain, while the other half were from those opposed to the idea.

The FHFA's position on eminent domain, in effect, sets up a legal battle between the federal government and state and local interests.

To read a complete analysis of the input received by the FHFA and the implications of eminent domain for the agency, click here.


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