FEB 13, 2014 1:01pm ET

HUD Looks to the Courts for Guidance on Eminent Domain

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Department of Housing and Urban Development Secretary Shaun Donovan kept his carefully neutral stance this week on the potential use of eminent domain to restructure underwater mortgages.

Mortgage and housing industry groups have asked HUD to rule that Federal Housing Administration-insured loans will not be used to refinance mortgages on properties that are condemned and seized by local government under eminent domain.

But Donovan said that the use of eminent domain to force the sale of private-label mortgages out of securitized trusts must be decided by the courts.

There are very specific rules about the use of eminent domain, Donovan said at a Politico event Wednesday, and "it needs to be decided by the courts."

The courts will have to decide "if it is legal" and whether the local municipalities are "paying a fair price for these mortgages. I think those are high bars. And they should be high bars," Donovan said.

That response was disappointing for the American Land Title Association.

"Secretary Donovan's remarks do not provide homeowners, mortgage lenders and municipalities the guidance they are looking for regarding the use of eminent domain to seize underwater mortgages," said Michelle Korsmo, the group's chief executive. "Waiting for these eminent domain proposals to be resolved in the court system will likely take years and cost these interested parties significant dollars."

In August, then acting Federal Housing Finance Agency Director Edward DeMarco warned that he would direct Fannie Mae and Freddie Mac to stop purchasing mortgages in jurisdictions that use eminent domain to restructure mortgages.

New FHFA Director Mel Watt may be reviewing that issue along with others as settles into the post.

Meanwhile, HUD is taking the position that the use of FHA to refinance seized mortgages can only be decided when the agency receives a loan application.

HUD staked out that view in an Aug. 12 letter to three California congressmen when Richmond, Calif., was facing private lawsuits to stop it from condemning and refinancing underwater private-label loans.

"Pending legal developments and possible further execution of the plans in question, HUD does not know whether any new mortgage which might be created would qualify for insurance by the Federal Housing Administration," the letter says.

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