ACLU Shines Light on Potential Collusion of Federal Gov’t and Bankers to Suppress Use of Eminent Domain to Assist Homeowners
On December 5, 2013, the ACLU and other nonprofit organizations filed a federal lawsuit under the Freedom of Information Act (FOIA) against the Federal Housing Finance Agency ("FHFA"), which was created by Congress via the Housing and Economic Recovery Act of 2008 with a mandate to assist with the recovery of the housing market, as well as to regulate Fannie Mae and Freddie Mac. The lawsuit is styled as Alliance of Californians for Community Empowerment, et al. v. Federal Housing Finance Agency. The following portions of the introduction to the complaint describe the background and nature of the lawsuit:
This is an action…to enforce the public’s right to information about the Federal Housing Finance Agency’s relationship with the nation’s largest financial institutions and its efforts to prevent municipalities from implementing a program to address the mortgage foreclosure crisis….Because many homeowners received mortgages at the height of the housing bubble, there are huge numbers of homeowners who owe more on their mortgages than their homes are now worth, that is, they are “underwater.”
Economists across the political spectrum have identified this kind of mortgage debt as one of the prime obstacles to strong economic growth and have recommended that the government implement a program of widespread mortgage principal reduction. Such a program would bring the amount of debt owed by homeowners more in line with the current value of their homes. The Secretary of the Treasury has called for defendant Federal Housing Finance Agency (“FHFA”) to permit the entities it oversees to use targeted principal reduction in their loan modification programs. The Congressional Budget Office estimated that such a program could save taxpayers $2.8 billion. While both homeowners and taxpayers stand to benefit from a program of principal reduction, the FHFA has declined to implement a principal reduction program on loans owned by Fannie Mae or Freddie Mac, which it oversees.
Inaction at the federal level has prompted local communities to take action. Richmond recently offered to purchase certain underwater mortgages secured by Richmond homes, indicating that it would consider the use of eminent domain if lenders refused to sell the loans at fair market value. After purchasing these mortgages, Richmond plans to originate new mortgages for the current homeowners on terms that reflect the actual present value of their homes. Despite the FHFA’s mandate to maximize assistance to struggling homeowners and promote programs that reduce foreclosures, the agency responded by threatening to bring legal challenges against Richmond or any other city that were to use eminent domain to reduce mortgage principals. Plaintiffs seek to find out why.
The following portions of the FOIA request attached to the complaint describe Richmond’s attempted assistance of its resident homeowners and the backlash by bankers and the FHFA:
On July 31st, 2013, the City of Richmond, CA made offers to purchase 624 underwater mortgages from the current servicers and trustees in order to refinance the mortgages. On September 11th, 2013, the Richmond City Council voted to move forward with the use of eminent domain to provide relief to struggling homeowners.
On August 7th, 2013, Wells Fargo and Deutsche Bank filed a federal lawsuit against the City of Richmond in an attempt to block the City from this contemplated use of eminent domain. While the lawsuit was dismissed for ripeness in early September, it will likely be re-filed and fully adjudicated when Richmond implements its plan.
[O]n August 8th, 2013, just one day after the banks’ suit was filed against Richmond, the FHFA released a statement citing “serious concerns on the use of eminent domain to restructure existing financial contracts.” The FHFA also listed a number of possible sanctions and legal actions that might be initiated against municipalities or states that implemented such a policy.
As noted by the plaintiffs in the complaint, the FHFA’s threat to municipalities “is particularly difficult to understand in light of the fact that Richmond, and all other municipalities considering using eminent domain for principal reduction, have stated that they will use their eminent domain authority only to target loans held in private-label mortgage-backed securities. By definition, the loans that the government sponsored entities, supervised by the FHFA, guarantee and securitize are packaged into agency mortgage-backed securities, and are therefore not subject to seizure under the eminent domain programs under discussion.” It is clear from the complaint and the information requested that the ACLU and the other plaintiffs suspect the FHFA leadership of improperly colluding with the bankers in an effort to suppress local government attempts to assist local homeowners with underwater mortgages by paying fair market value for private-label mortgage-backed securities (via negotiation or eminent domain).