Mortgage Industry Girding to Block Eminent Domain Laws

Posted on Sep 25, 2012

The Mortgage Bankers Association and other industry groups have lined up serious legal talent to prevent and block any local community from invoking eminent domain to seize and restructure underwater mortgages.

Their attorneys have assured the industry that this unprecedented use ofeminent domain raises multiple questions under the U.S. Constitution and state laws. And they could contest any seizure and keep the matter bottled up in the courts.

So far, only a few communities have embraced the concept of eminent domain promoted by Mortgage Resolution Partners LLC, a San Francisco residential finance firm.

Not one mortgage has been seized yet. But the industry is concerned that any seizure could poison the well. “What investor in their right mind would ever invest in a community that allows arbitrary writedowns of negative equity,” said MBA president and chief executive David Stevens.

“The lack of investment capital will have a direct and profound impact on every future homebuyer in that community,” he said last week at a MBA symposium on eminent domain.

To fight its battle, the industry has turned to Congress for help. Rep. John Campbell, R-Calif., has introduced a bill that would essentially cut off a community’s access to government-backed loans if local officials invoke eminent domain to seize mortgages.

It would be very difficult to get Congress to pass a bill like that. But it shows the lengths the industry will go to stop the use of eminent domain in the seizure of mortgages. Industry officials are seriously concerned eminent domain could undermine the mortgage finance system. And its use as proposed by Mortgage Resolution Partners strikes a vulnerable sector of the mortgage market: private-label mortgage-backed securities.

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