Commentary
A couple of important news items crossed our desk in the last couple of weeks that we wanted to share. The first news item was the Housing and Urban Development’s (HUD) proposal to use the disparate impact theory and apply it to fair housing. The second news item was another look at the proposed use of eminent domain to seize underwater mortgages from pools of mortgages contained in mortgage-backed securities in order to “help” the housing recovery.
We would love hear to what you think about these two important issues.
Disparate Impact Applied to Fair Housing Policies
The U.S. Supreme Court has agreed to rule on HUD’s proposal to apply disparate-impact theory to fair housing. Disparate impact in housing is defined as the adverse impact of certain rental or mortgage qualification practices on members of a protected class of people. For example, a background check for felony convictions might disproportionately impact black and Hispanic rental and/or mortgage applicants compared to white or Asian rental and/or mortgage applicants.
The high court will review the case of Mount Holly Gardens Citizens in Action, Inc. versus Mount Holly. In this case, the residents of a neighborhood targeted for redevelopment by the Township of Mount Holly, N.J., are claiming disparate impact.
A ruling by the court is not expected until next year. If the court approves the use of disparate impact in this case, the ruling could have significant negative consequences for rental real estate owners and mortgage lenders.
For more see:
Inman News: “Disparate Impact Doctrine Troubling Property Owners Mortgage Lenders and Employers”
HUD’s Guidance on the implementation of the Fair Housing Act as it applies to “Disparate Impact”.
Eminent Domain Applied to Underwater Mortgage Debt
Eminent domain, defined as the power to take private property for public use by a state, municipality, or private entity authorized to operate on behalf of a public entity, in exchange for “just compensation” to the owner of the property, is once again being bandied about as a solution to the housing crisis.
Last summer, San Bernadino County California, and its two largest cities, Ontario and Fontana, made headlines when they were approached by a private company, Mortgage Resolution Partners, to use eminent domain to seize underwater mortgages contained in mortgage-backed securities (MBS) to offer homeowners debt relief or a loan modification.
That proposal was scrapped, but the idea of solving the housing crisis via eminent domain to take ownership of mortgage loans resurfaced in early June with the publication of a Federal Reserve research paper. The proposal is actively being considered by Richmond, California and North Las Vegas, Nevada. Eminent domain has never been used for this purpose. In our view, allowing a private company to approach a public municipality, who then uses eminent domain to seize underwater mortgages from private bondholders in a profit-sharing scheme that benefits both parties, not only establishes a dangerous precedent; it invites litigation and is likely unconstitutional. We sincerely doubt this proposal will ever see the light of day, but the topic did warrant being on our radar.
For more on this issue see:
Wall Street Journal: “Cities Consider Seizing Mortgages”
Bloomberg News: “Eminent Domain Debate for Mortgages Revived by Fed Paper”
New York Federal Reserve: “Using Eminent Domain to Solve Underwater Mortgage Debt”
New York Federal Reserve: “Paying Paul and Robbing No One: An Eminent Domain Solution for Underwater Mortgage Debt”
San Jose Mercury News: "Eminent Domain Could be Used in Battle Against Foreclosures in Richmond"
HousingWire: "North Las Vegas Closer to Using Eminent Domain for Underwater Mortgages"
HousingWire: "North Las Vegas Closer to Using Eminent Domain for Underwater Mortgages"
Vegas Review: "North Las Vegas Sued Over Plan to Seize Home Mortgages"
Mortgage Resolution Partners' side of the story
