Freddie Mac Threatens Eminent Domain Suit

Freddie Mac fired a warning shot in the direction of the City of Richmond California today, threatening to sue if the city moves forward with its plan to seize over 600 underwater mortgages on properties located in the city. Richmond sent letters to mortgage servicers last week asking to buy the mortgages but making it clear it would use its power of eminent domain to take the mortgages if the servicers did not sell voluntarily.

Richmond is among a handful of cities nationwide who have announced their intentions of using eminent domain in such a manner, hoping to restructure the loans at the actual market value of the underlying collateral in an effort to keep homeowners from losing their homes. The plan, first put forward by San Bernardino County, California has provoked a storm of protest from groups representing investors in mortgage-backed securities as well as introduction of a law in Congress which would penalize communities that carried out such plans. San Bernardino recently announced it was no longer considering the plan.

In a conference call to discuss second quarter financial results released today, Freddie Mac's general counsel William McDavid said "Our sense is that those so-called voluntarily loan sales would not be very voluntary. They're loan sales under pressure - in fact, under a threat of seizure by eminent domain. We would consider taking legal action."

Reuters quoted Denise Dunckel, spokesperson for the Federal Housing Finance Agency (FHFA), regulator of Freddie Mac and its sister company Fannie Mae as saying "Fannie Mae and Freddie Mac are investors in these securities. This is an issue that we are discussing." The two companies, under federal conservatorship since 2008, would need FHFA approval before taking any legal action, a situation that McDavid acknowledged in talking to reporters.

Richmond and other cities have been working with San Francisco-based Mortgage Resolution Partners (MRP), a private investment firm that proposes raising private money for financing the loan purchases. MRP would restructure the loans for resale on the secondary market and would receive a fee for each loan restructured, The Wall Street Journal said that 444 of the 624 loans Richmond is proposing to buy are current on their payments.