ALTA Further Clarifies Eminent Domain Debate
On September 11, the Mortgage Bankers Association (MBA) released an update titled ALTA Statement Further Clarifies Eminent Domain Debate.
ALTA Statement Further Clarifies Eminent Domain Debate
The American Land Title Association issued a statement over controversial plans involving eminent domain and underwater mortgages, saying such plans raise “profound” constitutional concerns.
ALTA said (http://www.alta.org/press/9-11-2013%20ALTA%20Eminent%20Domain%20Statement.pdf) plans by Richmond, Calif., and other municipal and county governments to work with a private company to employ eminent domain in seizing homes with negative equity create legal uncertainty and confusion and will likely take years to resolve.
“The use of a municipality’s power of eminent domain to seize mortgage loans raises profound constitutional and other legal concerns,” said ALTA CEO Michelle Korsmo. “It is clear that the recent proposal in Richmond, California, and subsequent legal filings are likely the start of a long and drawn out legal process.”
Korsmo said the action also creates confusion for borrowers, who may not know who to pay or the amount they need to pay off their mortgage.
“Any purported extinguishment of an original mortgage obtained through the eminent domain process may cause title insurance to be unavailable in subsequent transactions, or, at a minimum, result in exclusions from title insurance coverage,” Korsmo said. “Title insurance protects real property owners and mortgage lenders against losses from possible defects in the title. In addition, rulings on eminent domain challenges in one jurisdiction will likely create a ripple effect impacting the legality of this type of eminent domain in all jurisdictions.”
Richmond is one of the largest cities in the U.S. to embrace a private-sector program offered by Mortgage Resolution Partners to seize underwater mortgages through eminent domain–in some instances for as little as 25 cents on the dollar. In letters it sent to more than 30 servicers last month, the city offered to purchase more than 600 mortgages. The city said if the servicers do not agree to sell, it would seize the mortgages.
Other municipalities, such as Fontana and Ontario, Calif., North Las Vegas, Nev., and towns in Colorado, Illinois and Massachusetts have also considered eminent domain as a strategy to seize underwater mortgages. Most of these have backed off the strategy following discussion with the Mortgage Bankers Association, local mortgage bankers’ groups and other industry group about drawbacks, including potential restriction of future lending.
In response to the letters sent by Richmond, a group of plaintiffs representing some of the nation’s largest bond investors filed a lawsuit (http://mba-pac.informz.net/mba-pac/data/images/investorcomplaintaugust72013.pdf) against the city and MRP, arguing that use of eminent domain as proposed is unconstitutional because it benefits a small group of Richmond citizens at the expense of out-of-state investors, effectively violating the interstate commerce clause. The lawsuit argues, among other claims, that loans are not being seized for a valid public purpose, a key element required for any use of the power of eminent domain.
MBA has been a leading opponent against such use of eminent domain. In an affidavit supporting the lawsuit (http://mortgagebankers.org/files/Wellsv.RichmondEDDHSAffid.pdf), MBA President and CEO David Stevens said such eminent domain actions could cause “irreparable harm” to current homeowners and prospective homebuyers. “If it is demonstrated that any local government can simply intervene and abrogate a private lending contract, the uncertainty that will be introduced in to the mortgage system and housing market will impact lending everywhere in the U.S.,” Stevens said.
The Federal Housing Finance Agency and HUD have also expressed concerns with such programs, saying it would severely impact loans guaranteed by Fannie Mae, Freddie Mac and FHA. FHFA said it had the discretion to direct the GSEs to stop their activities in towns that use eminent domain to seize mortgages; HUD expressed “doubt” that such mortgages would qualify for FHA financing.
Also last month, Fitch Ratings, New York, said such use of eminent domain would likely negatively affect private-label U.S. residential mortgage-backed securities and future lending in those regions. Fitch said should Richmond and other local governments succeed, such programs could “further weigh on private investor confidence and appetite for private-label mortgage-backed securities going forward.”
“We expect action on these plans to be slow and legally challenged,” Fitch said. “In addition to pushing losses forward on performing loans, the use of eminent domain could also have other unintended consequences, including increasing mortgage interest rates and decreasing credit availability in affected areas.”
To view the online release, please click here.
Safeguard Properties is the largest mortgage field services company in the U.S. Founded in 1990 by Robert Klein and based in Valley View, Ohio, the company inspects and maintains defaulted and foreclosed properties for mortgage servicers, lenders, and other financial institutions. Safeguard employs approximately 1,700 people, in addition to a network of thousands of contractors nationally. Website: www.safeguardproperties.com.