California Eminent Domain Home Loan Refinance Plan Could Be Blocked

A recent press release issued by the Federal Housing Finance Agency could affect plans by some California lawmakers. A July report on discussed a plan by city officials in San Bernadino, California to use the power of eminent domain to take possession of underwater mortgage loans and then help the owners refinance into lower rates.

According to the report on, “Half of all 300,000 mortgages in the Southern California county are underwater, according to county officials. While some are in the process of foreclosure, a good number of affected homeowners are still paying their mortgages — with only dim hopes that their homes will ever recover in value.” Officials in San Bernardino hope, according to the NPR report by Yuki Noguchi, to use eminent domain as a “powerful legal tool that can force mortgage investors to sell those loans and cut through all the red tape.”

The eminent domain strategy considered by San Bernardino officials is also under consideration in other states including Illinois, but the Federal Housing Finance Agency may act to prevent eminent domain being used in such a way.

According to the Federal Housing Finance Agency Press release from August 8, 2012. “The Federal Housing Finance Agency (FHFA) has sent to the Federal Register a Notice indicating its concern with the proposed use of eminent domain to restructure performing home loans and inviting public input.”

The release also says, “As conservator of Fannie Mae and Freddie Mac and regulator of 12 Federal Home Loan Banks, FHFA has significant concerns about the use of eminent domain to revise existing financial contracts and the alteration of the value of the companies’ securities holdings.  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.  Additionally, FHFA has concerns that such programs could negatively affect the extension of credit to borrowers seeking to become homeowners and on investors that support the housing market.”

At the time of this writing, no final decision has been made on the issue, but if FHFA moves against the use of eminent domain, it could mean some underwater homeowners must seek a different home loan refinancing alternative in areas like San Bernardino, California and Chicago, Illinois where the eminent domain controversy is being carefully watched.

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