WE’RE HEARING more and more cities are flirting with the use of eminent domain to condemn mortgages and that is going to cause a lot of trouble for the HUD secretary.
In states like Nevada where so many homeowners are underwater, almost any proposal that promises principal reduction and lower rates has to feel like a winning proposition.
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The American Securitization Forum called the city council’s decision “extremely shortsighted and dangerous.”
If North Las Vegas ultimately decides to use eminent domain, ASF executive director Tom Deutsch warned it will make it harder for all its citizens to get or refinance a mortgage, “which will further depress home prices.” (CoreLogic estimates 45% of Nevada mortgages are underwater.)
The PLS servicing and pooling agreements make it difficult, if not impossible, to provide relief for underwater borrowers who are current on their mortgage. And principal reduction definitely is not an option.
By getting a city to condemn a mortgage and sell it to MRP, the San Francisco-based mortgage company can refinance the homeowner via the FHA short refinance program.
This Federal Housing Administration program allows refinancing of conventional loans (not FHA loans), provided the investor reduces the principal amount by at least 10% and the LTV of the newly originated FHA-insured loan does not exceed 96.75%.
So far, demand for this short refi program has been surprisingly low. Just 2,200 underwater loans had been refinanced, according to a recent Treasury Department report.
But MRP wants to change that. If they are successful, it’s going to cause a headache for HUD secretary Shaun Donovan.
FHA officials have been getting an earful from congressmen that represent cities where MRP has solicited local officials.
These lawmakers want HUD to adopt a policy that blocks FHA from refinancing mortgages that are condemned and seized via eminent domain.
So far, FHA officials claim it’s “premature” to take a position since this novel use of eminent domain has not resulted in the seizure of one loan.
But that day may not be far off.
Meanwhile, the secretary desperately wants Congress to pass FHA reform. But to get it, he will be pressed to close the FHA short refi program to loans that were seized by eminent domain—something he doesn’t want to do.
Mark Fogarty is editorial director of the SourceMedia Mortgage Group and has been commenting on the mortgage market since 1984. Brian Collins is the group’s senior editor and D.C. bureau chief. He has worked the mortgage beat since 1988.
