High Stakes for Cities and Towns in Eminent Domain Showdown

September 27, 2012

By Mike Wallace

Mortgage Resolution Partners (MRP), an investment firm based in California, is pitching a plan to cities and counties involving the use of eminent domain that they say would help struggling homeowners in communities where federal programs like HARP and HAMP, the Home Affordable Refinance/Modification Programs, have done little to stem the rate of foreclosure. The MRP plan would target homeowners whose mortgages are held by private investors in private-label mortgage-backed securities, as opposed to mortgages held by public institutions like Fannie Mae, Freddie Mac, and the Federal Housing Administration. Unlike the public institutions, which have undertaken proactive homeowner assistance and foreclosure prevention efforts as a matter of federal policy, private financial institutions have been criticized for largely ignoring and occasionally stymieing federal efforts to assist struggling homeowners.

Under the MRP proposal, rather than rely on existing federal incentives to spur private mortgage servicers to help homeowners, MRP would like local governments to use eminent domain authority to take ownership of certain mortgages held in private securities and to compensate the private investors for their loss with a "fair market value" amount determined by the lower appraised values of underwater homes. Another feature of the plan is that the compensation due to the private investors from local governments would be fully funded by MRP. Once taken, the city and MRP would work to provide new financing with better terms for homeowners no longer encumbered by the interests of their previous mortgage holder. MRP would be paid a flat fee for each home taken and refinanced.

In places like San Bernardino County, CA, where 150,000 of 317,000 residential mortgages are underwater, the plan is being discussed as an innovative and reasonable last resort to help residents who feel ignored by mortgage servicers and who have been told they don't qualify for the same assistance available to homeowners whose mortgages are held by public institutions. In Washington, DC, however, the plan has come under intense criticism from mortgage industry representatives and members of Congress. Rep. John Campbell (R-CA) fired a warning shot at local governments considering the MRP proposal by introducing the "Defending American Taxpayers from Abusive Government Takings Act." Campbell's legislation would bar any public entity, including Fannie Mae and Freddie Mac who together guarantee nine of every 10 new mortgage loans, from financing mortgages in any jurisdiction for two years following any taking of a mortgage by eminent domain. In effect, mortgage lending would cease within those jurisdictions.

In September, the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, expressed concern about the proposal and requested input on the use of eminent domain to restructure performing loans. NLC and approximately 70 others submitted comments. NLC told FHFA that although NLC has no position on the use of eminent domain to restructure performing loans, any federal legislative or regulatory action that could impact use of eminent domain by local governments is a cause for concern, and that decisions regarding the specific application and limits of eminent domain are best made by democratically elected state and local officials familiar with and accountable to their communities. NLC further urged FHFA that "given existing federal limits on eminent domain authority, and the differing limits specific to each state, we believe it would be imprudent for FHFA to take any blanket action with respect to the exercise of eminent domain by state and local governments across the nation." 

The National Housing Conference (NHC), with whom NLC frequently collaborates, warned in their comments to FHFA that the proposal could do more harm than good and urged that no locality should adopt such a sweeping change without full information as to the likely consequences. Like NLC, NHC also asked FHFA to seek additional positive ways to help cities and counties respond to the foreclosure crisis rather than penalization.

Although FHFA's alarm and Congressman Campbell's bill are clearly targeted at the MRP plan, the potential for unintended consequences on unrelated takings by eminent domain should be cause for concern for local governments. Legislation to further curb or pre-empt local eminent domain authority has advanced in Congress each year since the Supreme Court's 2005 decision in Kelo v. City of New London that affirmed local eminent domain authority for economic development.

Just this past February, the U.S. House of Representatives approved, with little opposition, the "Private Property Rights Protection Act of 2011" to prohibit state and local governments from using eminent domain to acquire land for economic development purposes. The bill, if enacted, would have overturned the Supreme Court's decision in Kelo v. City of New London. Fortunately, the bill stalled in the Senate. However, NLC is concerned that the MRP proposal to San Bernardino County and other communities weighed down by their housing markets will bring new attention and scrutiny to eminent domain within Congress. If implemented poorly, the MRP proposal would give additional weight to groups that object to eminent domain entirely and possibly place eminent domain authority itself in jeopardy when Congress returns after the election.