Edward DeMarco has opened up a new front on his war against principal reduction.
On Thursday, the Federal Housing Finance Agency, which DeMarco oversees as acting director, threatened to take action against local governments considering using the power of eminent domain to write down the value of some underwater mortgages in their communities. The move comes a week after DeMarco ruled out principal reduction on loans controlled by Fannie Mae and Freddie Mac, the bailed-out mortgage giants he effectively controls as conservator of the companies.
The Federal Housing Finance Agency "has significant concerns about the use of eminent domain to revise existing financial contracts," the agency said in a notice filed in the Federal Register. "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."
The notice, which includes a request for public comment on the issue, comes as a handful of hard-hit communities in Southern California, Chicago and on New York's Long Island weigh a proposal by a venture fund, Mortgage Resolution Partners, that would have them seize underwater home loans held in private mortgage trusts. The local governments would then write off that debt, and help the homeowners refinance at the new, lower price.
Though just 10 percent or so of home loans are held in private trusts, they typically include those made in the years immediately proceeding the housing bust, and are thus the most likely to be deeply underwater and in danger of failing. Estimates vary, but somewhere around one quarter of all borrowers in the United States owe more on their home loans than they are worth. In the communities weighing the plan, including San Bernardino County, Calif., the percentage of underwater borrowers is close to 50 percent.
Officials in San Bernardino and Chicago could not be immediately reached for comment on the FHFA's warning about the proposal, but John Vlahoplus, chief strategy officer at Mortgage Resolution Partners, characterized the move "as another attempt by a bond holder trying to use its position to stop local governments from fixing the crisis."
Fannie Mae and Freddie Mac purchased private-label home loan bonds in the run-up to subprime crash, just like other investors. Fannie and Freddie, and by extension DeMarco, therefore have no greater say over what happens to these loans than any other bondholder that made an investment, Vlahoplus