San Bernardino homeowners may be blacklisted from future Fannie Mae and Freddie Mac (collectively Frannie) guarantees.

The Federal Housing Finance Agency (FHFA) has released a statement cautioning counties such as San Bernardino that using eminent domain to seize underwater mortgages (also called reverse eminent domain) may be unconstitutional and have a lasting impact on county residents’ ability to borrow money to purchase their homes.

The FHFA has not yet specified what, if any, action it will take if these reverse eminent domain projects are implemented. The agency is soliciting comments from the public via email: The last day for comments is September 7, 2012.

Mortgages guaranteed by Frannie are excluded from eminent domain plans proposed thus far. However, Frannie holds over $100 billion worth of privately issued mortgage-backed bond (MBB) securities on its portfolio, leaving the agencies exposed to considerable risk if the eminent domain takings occur.

first tuesday take

The benefits of reverse eminent domain far outweigh its liabilities.

Consider that seizing mortgages through eminent domain will free underwater homeowners from excessive monthly mortgage payments and allow them to contribute more of their paycheck to the local economy instead.

The result for everyone: more consumer spending, more business growth, more jobs, more savings, more home sales, more new construction, more jobs, greater economic growth — a phenomenon known as a virtuous market cycle, a condition we all need badly right now.

Related article:

San Bernardino: an underwater homeowner’s white knight?

Today’s widespread negative equity was created by the perfect storm of the Millennium Boom and following bust. Coupled with the high unemployment rate, the slog continues, necessitating county intervention. However, there is no reason for lenders to make an example of San Bernardino’s homeowners for fear of moral hazard sparking a wave of defaults.

Aside from the proposal’s obvious safeguard against mass defaults (only homeowners current on their payments are eligible), lenders are further protected by the peculiar condition of today’s housing market. Although depressed in terms of 2005 sales, today’s California housing market has stabilized and is unlikely to go through another crisis anytime soon.

Unfortunately, “reason” seems to be a rare quality in the FHFA’s current administration, whose lender-based bias against cramdowns — despite evidence of their benefits — has recently been under much public scrutiny for its near total failure to help homeowners rather than lenders.

Related article:

Reports suggest FHFA killed cramdowns without cause

The FHFA’s administrators have a tendency to bully policy makers into conformity with their personal prejudices.

Don’t let the debate be lender-engineered and one-sided; defend your homeowners and represent your industry by submitting a comment to the FHFA. Your comments might not alter their thinking, but they will clarify yours.

Re: “Fannie Regulator May Seek to Block Eminent Domain Seizures” by The Washington Post