In a think piece in yesterday’s American Banker, attorney Michael Reyen discusses that fact the City of Richmond, California’s “Seize The Mortgage” plan through the use of eminent domain has been stymied by the failure of the plan’s supporters to obtain the supermajority approval necessary to obtain City Council approval to move forward with the half-baked scheme. As a result, its supporters are trying Plan B: partnering “with another community to form a joint powers authority and carry out the plan.”
To date, it has not had any takers.
Why not? According to Reyen, because other municipalities fear (rightly, in my opinion) the costs and risks of litigation, and because the FHFA has threatened to pull Uncle Freddie and Aunt Fannie out of any municipality that starts seizing mortgages through such a means. As to litigation, although a federal court dismissed a lawsuit filed by mortgage loan securities trustees, the court did so “without prejudice.” In other words, the issue was not yet “ripe,” but if Richmond proceeds to actually implement the plan, “ripeness” will permeate the air like the scent of a thousand dead armadillos in the middle of an Amarillo blacktop in mid-August.
The negative reaction of the FHFA and mortgage securities investors would be even more consequential over the long haul.
The FHFA has stated that it may initiate legal challenges against any local or state government that sanctions the use of eminent domain to restructure mortgage loan contracts in a way that affects FHFA’s regulated entities, Fannie Mae and Freddie Mac. It has also said that it may act by order or regulation to “direct the regulated entities to limit, restrict or cease business activities within the jurisdiction of any state or local authority employing eminent domain to restructure mortgage loan contracts.” This amounts to a death sentence for residential mortgage lending in any municipality in which the FHFA limits, restricts or ceases business activities.
Notwithstanding these “strong headwinds,” Reyen thinks that the idea is not yet dead, and cites the interest of Irvington, New Jersey, in pursuing the scheme. In my view, the headwinds will only become stronger if these plans move forward. In addition, as the economy continues to improve and real estate values eventually recover, the “need” for such “creative” measures to assist underwater borrowers will be harder to justify. That won’t stop true believers from believing in it, but it may finally crater any practical chance of any such plan being seriously pursued to the point of “ripeness.”