DEC 5, 2013 4:45pm ET

ACLU Sues FHFA over Limiting Eminent Domain

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A lawsuit was filed on Tuesday under the Freedom of Information Act questioning the Federal Housing Finance Agency’s decision to block municipalities from using eminent domain to modify a distressed borrower’s mortgage and prevent foreclosures.

The subprime mortgage meltdown resulted in more than four million homeowners already foreclosed upon and nearly 11 million borrowers are currently underwater. Communities with large African-American and Latino populations, such as Richmond, Calif., and Irvington, N.J., have been particularly hard hit.

That is why Richmond has adopted a plan to use eminent domain to purchase securitized underwater mortgages so it can re-issue new mortgages for the homeowners on terms that reflect the current value of their properties. If the owners of the securities refuse to sell at fair market prices, the city proposes to use eminent domain to buy them in order to lower a borrower’s monthly mortgage payments.

“If eminent domain can be used in blighted neighborhoods to seize property that will be turned over to private developers, then eminent domain should also be available to help homeowners stay in their homes and to stabilize neighborhoods,” said Rachel Goodman, staff attorney with the ACLU’s Racial Justice Program.

But the FHFA has threatened legal action against Richmond and any other city that uses eminent domain to reduce mortgage principals and denying credit to people seeking mortgages in hard hit communities. The American Civil Liberties Union and the Center for Popular Democracy want the FHFA to provide details about its relationship with the financial industry on this issue, according to the lawsuit.

Community groups in October filed a FOIA seeking information about the FHFA’s exchanges with banks and financial institutions regarding eminent domain, but the agency never responded which led to this lawsuit.  

“Struggling families need options, not threats,” says Ady Barkan, staff attorney with the Center for Popular Democracy. “As cities explore solutions that can work for them, the FHFA should be encouraging programs to end the foreclosure crisis, reduce debt, and rebuild our economy, not clamping down on them.”

An FHFA spokeswoman declined comment on the pending litigation.

The Secretary of the Treasury has called for FHFA to permit the entities it oversees to use targeted principal reduction in their loan modification programs. The Congressional Budget Office estimated that this program could save taxpayers $2.8 billion.

While both homeowners and taxpayers would benefit from a program of principal reduction, the FHFA has declined to implement a principal reduction program on loans owned by Fannie Mae or Freddie Mac.

“The FHFA has taken an aggressive stance on this issue in a way that has harmed minority communities. The public deserves to know why,” says Linda Lye, staff attorney with the ACLU of Northern California.

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