Regulator warns against use of eminent domain to refinance homes

WASHINGTON — The regulator for mortgage giants Fannie Mae and Freddie Mac on Wednesday warned against the use of eminent domain to restructure home loans.

San Bernardino County has proposed using such powers to seize distressed mortgages at a discount and then refinance them for struggling homeowners. Chicago officials also are considering the idea, according to reports. Although mortgage rates are near record lows, underwater homeowners are essentially blocked from refinancing their loans.

According to CoreLogic, some 11.4 million, or 23.7%, of all residential properties with a mortgage are “underwater” or “upside down,” meaning that borrowers owe more on their mortgage than their homes are worth. There are federal programs to aid such borrowers, but so far they are only available to a small segment of those mortgage holders.

The Federal Housing Finance Agency made clear its opposition to the use of eminent domain for fixing mortgages.

“As conservator of Fannie Mae and Freddie Mac and regulator of 12 Federal Home Loan Banks, FHFA has significant concerns about the use of eminent domain to revise existing financial contracts and the alteration of the value of the companies’ securities holdings,” the agency said in a statement.

“FHFA has determined that action may be necessary on its part to avoid a risk to safe and sound operations at its regulated entities and to avoid taxpayer expense. Additionally, FHFA has concerns that such programs could negatively affect the extension of credit to borrowers seeking to become homeowners and on investors that support the housing market,” it added.

Lobbyists for banks and securities firms such as the Securities Industry and Financial Markets Assn. have made similar points. Treasury Secretary Timothy F. Geithner was cool to the idea when asked at a congressional hearing last month.

Geithner recently clashed with the head of the FHFA, Edward DeMarco, over the agency’s refusal to engage in mortgage principal write-downs.

Goldstein writes for