San Francisco's controller discouraged lawmakers from going forward with a proposal to use the city's eminent-domain powers to help homeowners avoid foreclosure, citing federal limitations and risks to the city's borrowing costs.
"The city's participation in an eminent-domain program will likely have broader negative impacts on the city's participation in financial markets, at least for an initial period," San Francisco's Controller Ben Rosenfield wrote in a report released Thursday.
The study is a response to a proposal from San Francisco Supervisor John Avalos to use eminent domain to take over loans on property with a market value below the mortgage amount. Avalos has said he wants to help working-class and middle-class workers stay in the city of about 837,000.
The San Francisco Board of Supervisors asked the controller in October to look into the idea of partnering with Richmond, a nearby refinery town of about 108,000 that voted in 2013 to adopt a plan to use eminent domain to seize loans and modify them to help homeowners.
The report cited a federal law that bars some government agencies from involvement in any mortgage seized through eminent domain. While it doesn't place any restrictions on U.S.-backed mortgage giants Fannie Mae and Freddie Mac, a memo from the general counsel at the Federal Housing Finance Agency said the practice threatens their safe and sound operations, the report said.
"Precluding any participation from Fannie Mae and Freddie Mac, the use of eminent domain would seem to be an inviable option," according to the study.
The controller recommended developing a mortgage-assistance program for borrowers with troubled mortgages that would reduce the principal loan amount. He also suggested creating an emergency-assistance program for homeowners facing an unexpected hardship who have defaulted or are at risk of default.
Rosenfield didn't immediately respond to calls seeking comment. Jeremy Pollock, a spokesman for Avalos, also didn’t immediately respond to a call and email seeking comment.
"Using eminent domain could put the entire city's residents at risk by making lenders less willing to lend money to future homebuyers," David Stevens, president of the Mortgage Bankers Association, said in an emailed statement.
