This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Freddie Mac Fires First Salvo In Eminent Domain Mortgage Battle

NEW YORK ( TheStreet) -- Freddie Mac (FMCC) said it would consider suing the city of Richmond, Calif. if it chooses to use eminent domain laws to seize mortgages of underwater borrowers and modify them in an effort to prevent more foreclosures.

Eminent domain is the power of the state to seize private property for public use or benefit. The owner is typically entitled to reasonable compensation, referred to as fair market value.

Richmond recently became the first city to test whether the laws could be used to seize mortgages. The city plans to buy mortgages at "fair market value" or, if investors do not sell at the negotiated price, seize them through eminent domain for a compensation to be determined by court.

Richmond officials argue that modifying loans would prevent further defaults, prevent foreclosures and ultimately raise property values in the city.

Still, the use of the law to seize mortgages has little legal precedent and has the industry up in arms.

"Our sense is that so-called voluntary loan sales would not be very voluntary. They are loan sales under pressure in fact, under a threat of seizure by eminent domain. We would consider taking legal action," William McDavid, general counsel of Freddie Mac, on a conference call with reporters Wednesday, according to Reuters.

The Federal Housing Finance Agency, regulator of Fannie Mae (FNMA) and Freddie Mac, has previously voiced concerns over the use of eminent domain.

The agencies are big buyers of private-label mortgage-backed securities.

While critics of the proposal say the use of eminent domain to seize mortgages is likely unconstitutional, legal experts say the city may be within its rights in doing so. But that does not mean it won't have a legal battle on its hands.

Compensation for the mortgages are determined by the courts and it is very likely that investors will challenge the city on its valuation of the mortgage. The city wants to buy the loan at a discount to the current value of the property.

Investors owning an underwater mortgage that is still current will likely want to be paid in full. So expect a fight over pricing for every loan.

Cities might find that they might have to pay more for a mortgage and it isn't clear if the economics of the proposal would work under those circumstances.

Meanwhile, investors have said they would tighten underwriting or charge higher rates in communities that threaten to use eminent domain to seize loans.

For cities still struggling to get back above water, however, this is a daring proposal that might just work.

-- Written by Shanthi Bharatwaj New York.

>Contact by Email.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
FNMA $2.24 0.00%
FMCC $2.17 -0.46%
FB $93.66 1.70%
GOOG $635.05 1.30%
TSLA $246.24 -0.54%


Chart of I:DJI
DOW 16,651.49 +179.12 1.09%
S&P 500 1,971.80 +20.44 1.05%
NASDAQ 4,748.9310 +41.1560 0.87%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs