Will FHFA opposition to principal reductions boost eminent domain efforts?
By Matthew Goldstein and Jennifer Ablan
There’s nothing surprising about FHFA head Ed DeMarco’s decision to nix the idea of writing down some of the debt owed by cash-strapped homeowners on mortgages guaranteed by Fannie and Freddie. DeMarco, whose agency regulates Fannie and Freddie, has been a consistent opponent of principal reductions–something we pointed out last October in our story on the need for a “great haircut” on consumer loans and including student and mortgage debt to stimulate the economy.
But DeMarco’s renewed opposition comes at a time that there is a growing consensus that something needs to be done on the housing front to get the U.S. economy going, as opposed to simply churning along at the current anemic rate of growth. More and more economists are saying that reducing mortgage debt will not only reduce foreclosures, it will give ordinary Americans more money to spend on goods and services.
It doesn’t take an MBA from Harvard to know that when people have spending power it translates into more demand and that usually prompts employers to hire more people to fill that demand.
DeMarco’s opposition also comes at a time that some local government officials in communities hit hardest by the housing crisis are toying with ideas that once seemed too controversial to imagine. We’re, of course, talking about the idea of using eminent domain to seize and restructure underwater mortgages–something we first reported on in early June. (Sorry, Matt Taibbi, we had the story first).
Mortgage Resolution Partners, the investment firm that is pushing the idea of eminent domain as a mortgage fix, is only talking about seizing home loans held in private labeled mortgage-backed securities. The firm is deliberately avoiding MBS issued by Fannie and Freddie possibly because of DeMarco’s opposition to principal reductions. MRP’s focus on private label MBS has earned the wrath of many mortgage bond investor trade groups.
Up until DeMarco’s renewed opposition to principal reductions, the opponents of eminent domain appeared to be gaining the upper-hand–as questions about the legality of condemning a mortgage rather than real property have grown. But we wonder whether local government’s will now feel empowered to push ahead with an eminent domain strategy, especially if they see no relief coming from the federal government.