Use of eminent domain to seize mortgages erodes basic lending principles: FHFA general counsel

The general counsel for the Federal Housing Finance Agency has come out against a proposed plan to seize underwater mortgage by eminent domain, the Wall Street Journal reported. Alfred Pollard, who said he spoke for himself and not the FHFA, said the practice, proposed by municipalities and private investors would potentially erode the distinction between secured and unsecured lending.

“For 700 years in Anglo-American law, the use of property—collateral—to secure a loan was a contract that would be honored,” Pollard said at a Washington D.C. conference yesterday. The seizure of a mortgage, which is not real property, would call into question long-held distinctions between credit and collateral and could raise the cost of credit, Pollard said, according to the Journal.

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The plan to use eminent domain was originally proposed by San Francisco-based investment firm Mortgage Resolution Partners and calls for local governments to buy mortgages at the fair market value of their corresponding homes. The government would then help the homeowner refinance the mortgage and unburden them from underwater loans, previous reports show. Ben Bernanke has dodged the matter; Yale economist Robert Shiller has supported it. [WSJ] — Guelda Voien


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