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Feds Want to Stop Local Governments from Seizing Mortgages to Stop Foreclosures

U.S. regulators and lawmakers are seeking ways to keep local governments from using the power of eminent domain to seize mortgages, citing concern about the potential cost to taxpayers, investors and homebuyers.

The issue, the subject of a Mortgage Bankers Association symposium today, has gained attention in Washington after the city of Chicago and California’s San Bernardino County said they would consider confiscating home loans and cutting borrowers’ debt. No community has taken the step so far.

“What investors in their right mind would invest in a community that allows arbitrary writedowns of negative equity?” MBA president and chief executive officer David Stevens said at the symposium. “That lack of investor capital will have a direct and profound impact on future homebuyers in those communities, preventing a recovery of the housing market.”

The federal government is positioned to wield broad power in the debate because it owns or guarantees 90 percent of U.S. mortgages through government-sponsored enterprises and the Federal Housing Administration.

“We have to answer the question, is there a federal interest here?” Alfred Pollard, general counsel of the Federal Housing Finance Agency, regulator of Fannie Mae and Freddie Mac, said at the symposium. “I can tell you the answer is yes, there is a federal interest here.”

FHFA Effort

Pollard is leading an effort by the FHFA to determine whether Fannie Mae and Freddie Mac should intervene to discourage loan confiscations. In addition, a bill introduced last week by Representative John Campbell, a California Republican, would bar Fannie Mae, Freddie Mac, the Veterans Administration and the FHA from guaranteeing or buying loans in communities that seize mortgages.

The plan is “ridiculous,” Campbell said today. “To say this is a legitimate use of eminent domain is laughable.”

Local governments, whose tax bases are being eroded by foreclosures in the wake of the mortgage crisis, say they are being forced to act because lenders and federal officials have failed…

Read more: Bloomberg

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