Already a Bloomberg.com user?
Sign in with the same account.
WASHINGTON (AP) — The Federal Housing Finance Agency is considering taking steps to block local governments from seizing and restructuring troubled mortgages so homeowners avoid foreclosure.
The agency, which regulates government-run mortgage giants Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks, published a notice in the Federal Register on Thursday, inviting public input on the matter.
The FHFA said it has "significant concerns" with the proposed use of eminent domain by local governments as a tool to keep homeowners saddled by large mortgage payments from losing their homes, many of which are now valued at a fraction of what they were once worth.
Eminent domain is a power held by government to seize private property for public use. But in this scenario, government officials would use it to condemn mortgages so they can be seized from the investors who own them. At that point, the government would be free to restructure the terms of the loan so borrowers would have significantly lower monthly payments.
Officials in the county of San Bernardino, Calif., and two of its cities formed a local agency to consider the plan earlier this year.
In its notice in the Federal Register, the FHFA said it has determined that action may be necessary on its part to avoid taxpayer expense and risks to Fannie, Freddie and the other housing-related enterprises it regulates.
Fannie and Freddie own or guarantee about half of all U.S. mortgages, or nearly 31 million home loans. Losses from the use of eminent domain to seize and restructure home loans would ultimately be borne by taxpayers, the FHFA noted.
Such a use of eminent domain also would raise questions of constitutionality, consumer protection laws and the impact on millions of mortgage contracts, the agency said.
In addition, it could have a chilling effect on homebuyers' ability to get credit and on investors, the FHFA added.
The agency said it will accept public input until Sept. 7, and then it will move forward with deliberations to determine what action to take.