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FHFA should weigh in on eminent domain

by Ethan Handelman, National Housing Conference

Several cities and counties are considering using their eminent domain power to seize performing but underwater loans as a way to prevent foreclosures. NHC today urged the Federal Housing Finance Agency to weigh in on this issue so that local governments have full information on the consequences of pursuing such a risky policy action.

The desire for action to stem foreclosures and stabilize neighborhoods is understandable—the foreclosure crisis is severe and will not abate soon. Reducing the number of underwater borrowers could also benefit the economy as a whole. Federal policies have made some inroads, but several promising options such as targeted principal reductions by the GSEs and expansion of the Neighborhood Stabilization Program remain unused. Within that context, we can understand why localities might entertain extreme measures.

Eminent domain can be a powerful tool for curing blight and rejuvenating economically struggling areas. But the proposals being floated in San Bernardino County and elsewhere wander far beyond that mission and risk causing more harm than they do good. For a full discussion, read NHC’s letter, which notes:

  • Fair value determinations will trigger lengthy and expensive court battles.
  • Valuation risk will fall on localities, not new investors.
  • Loan volume would shift unnecessarily to FHA and taxpayers.
  • Local governments are not well-positioned to manage or restructure loans.
  • Proposals would encourage over-use of eminent domain to profit outside parties.
  • Lenders may reduce lending in affected communities.

Most critically, FHFA must make the consequences of eminent domain proposals clear to all by analyzing and describing the likely market reactions. If appropriate, FHFA should also describe how it would respond to eminent domain actions by localities. No locality should adopt such a sweeping change without full information as to the likely consequences. At the same time, FHFA should continue to seek other ways to respond to the foreclosure crisis, building on its good work in servicing and short-sale guidelines and reconsidering its position on targeted principal reduction.

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