Today’s American Banker has a story on the latest development in the let’s-use-eminent-domain-to-take-underwater-mortgages scheme: the Federal Housing Finance Agency has sent a strong shot across the bow of local governments contemplating such a move (e.g., San Bernadino, Chicago, even Berkeley):
Uh, don’t.
Full statement here, or below. The American Banker story is unfortunately behind a paywall, so we can’t bring it to you here, but we do have the highlights from a trio of Owners’ Counsel of America commentators who are quoted, us included:
“San Bernardino County cannot condemn federal property,” said Gideon Kanner, professor of law emeritus at Loyola Law School in Los Angeles and a longtime eminent domain expert. The FHFA is “a federal agency and the Feds can take the property of a state or city but the state or a local entity cannot take federal property.”
Robert Thomas, an attorney at the law firm Damon Key in Hawaii, called FHFA’s response “a pretty strong shot across the bow,” warning municipalities to rethink the idea of seizing mortgages.
“Federal property is immune from state and local condemnation so FHFA is trying to nip this before it gets to the courthouse door,” Thomas said. “This idea to seize performing but underwater mortgages has always been more smoke because the proposal is based on a couple of assumptions that may not be true.”
Anthony Della Pelle, an attorney at McKirdy Riskin in Morristown, N.J. agreed that municipalities may have trouble seizing loans owned by a federal agency.
Loans owned by a private bank or other lending institution would have to satisfy the two primary requirements for eminent domain seizures of having a public purpose and providing just compensation to the owner of the mortgage, he said.
Here’s the link to the entire story, if you subscribe. Here’s more, from FHFA (how to submit public comments to FHFA, not later than September 7, 2012).
We’re not financial geniuses, but you don’t need to be one to view the scheme with a skeptical eye:
- It comes at a time when the redevelopment shell game was abruptly terminated, and California cities are looking for other ways to leverage their power of eminent domain.
- No one seems to like lenders these days, and they make an easy boogieman/fall guy, the one party who would supposedly be left holding the bag.
- The plan was hatched by a private outfit, the same private investors who would be the obvious beneficiaries of the plan, if it worked.
- The plan is to take only performing underwater loans, and it appears to us that the cities might not be valuing them properly, or are at least assuming that they will come cheaper than they are truly worth.
This one isn’t over folks, so we will keep watching.
Federal Housing Financial Agency Press Release (Aug, 8, 2012)