HUD Takes a ‘Wait and See’ Approach on Eminent Domain

Despite acknowledging general concerns, Obama administration officials said it’s too soon for them to weigh into a messy debate between bondholders and community groups over the use of eminent domain to forcibly purchase and restructure underwater mortgages.

Elliot Mincberg, a top official at the Department of Housing and Urban Development, responded earlier this week to three California lawmakers who had asked the agency to clarify its views on the proposed use of eminent domain by cities to write-down mortgages.

The City of Richmond, Calif., has said that it will use the powers of eminent domain to acquire some 624 mortgages on which the homes are worth less than the loan balance. Bondholders have sued in federal court to block the seizures, and banks representing the bondholders have said they aren’t contractually allowed to sell individual loans out of mortgage-backed security trusts.

Working with a private investment firm called Mortgage Resolution Partners, the city would write-down the loan balance if they could purchase the debt at a discount to the current market value of the home. Then, they would get their cash back and cover the costs of the transaction by refinancing the smaller loan into a mortgage backed by the Federal Housing Administration, according to MRP officials.

The Wall Street Journal reported on Thursday that officials in Richmond are seeking to purchase loans with balances as large as $1.12 million. The FHA guarantees mortgages with balances as large as $729,750 in high-cost markets such as San Francisco.

Because the whole program would rely heavily on refinancing the mortgages into FHA backed loans, the views of officials at HUD, which controls the FHA, are particularly noteworthy. The Federal Housing Finance Agency, a separate regulator for Fannie Mae and Freddie Mac, has said it is concerned enough about the loan seizures to consider taking legal or regulatory action to block the plan.

So where does HUD come down in all of this? It’s hard to say because the letter isn’t very specific. HUD is “concerned about the developments,” wrote Mr. Mincberg. But the letter doesn’t say whether HUD is concerned enough to say, for example, that it wouldn’t insure loans that had been acquired via eminent domain. (Read the letter here.)

HUD won’t offer more guidance, said Mr. Mincberg, until there’s more information about how the city would use eminent domain. “If necessary, HUD will issue informational guidance to FHA approved lending institutions as appropriate,” he wrote.

The FHA doesn’t directly purchases mortgages. Instead, it insures those that meet its standards from hundreds of participating mortgage companies. If the agency decided it wasn’t going to insure loans backed by the FHA, then that could greatly complicate—and possibly kill—efforts by the city to seize mortgages without finding new investors.

Officials from MRP have met with a number of policy makers in Washington, including a meeting with White House officials earlier this year, and they have said they are confident federal officials won’t get in their way.

“As we continue our work in Washington, people listen attentively, and it’s my impression they will be supportive if and when we need them to be,” Steven Gluckstern, the chairman of MRP and a major donor to President Barack Obama’s 2008 presidential campaign, told The Wall Street Journal in June.

http://blogs.wsj.com/developments/2013/08/16/hud-takes-a-wait-and-see-approach-on-eminent-domain/