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Feds sued over foreclosure-fighting tactic

NEWARK, N.J. -- The American Civil Liberties Union has sued the Federal Housing Finance Agency, asking it to disclose efforts to stop municipalities from using eminent domain to bail out underwater homeowners.

The ACLU, Center for Popular Democracy and other nonprofits filed a freedom of information lawsuit against the agency Thursday in federal court in San Francisco.

By using eminent domain, municipalities can circumvent mortgage contracts, acquire loans from bondholders, write them down and give them back to the bondholders with reduced principals. According to Cornell University law professor Robert C. Hockett, who devised the plan, only government has the power to forcibly sidestep mortgage contracts.

The tactic only works with so-called private-label security mortgages, or ones that are not backed by the federal government. FHFA oversees government-backed loans owned by Fannie Mae or Freddie Mac. They cannot be seized by eminent domain.

The lawsuit said one of the agency's "statutory mandates is to help the housing market recover," and threatening to sue municipalities that try to use eminent domain conflicts with that obligation. "By threatening legal action," the suit said, the agency "effectively blocks the communities hit hardest by the foreclosure crisis from pursuing one potentially effective solution on behalf of their residents."

An FHFA spokeswoman said the agency is not commenting on the lawsuit.

Richmond, Calif., was the first city to officially codify the divisive foreclosure-fighting plan, which has drawn zealous opposition from Wall Street and Washington. Two lawsuits challenging the use of eminent domain have been thrown out but will likely be refiled. The city has not yet used eminent domain to seize a mortgage.

Irvington, N.J., is moving forward with the strategy, and the city council in Newark took its first steps toward moving forward with a plan Wednesday. Yonkers is considering it, but other places have scrapped the idea because of opposition from banks or legal hurdles.

The FHFA said in August it may initiate legal challenges against municipalities that want to use eminent domain to fight foreclosures and could direct regulated entities to stop doing business in those places. The ACLU said most of the cities exploring the use of eminent domain have been besieged by foreclosures and have predominantly low-income, minority populations.

The nonprofits filed freedom of information requests with the agency in October, seeking communication between agency leadership and representatives of the banking, mortgage and financial industry, and records of meetings between the agency and financiers.

FHFA acknowledged, but did not complete, the requests, according to the lawsuit, so the groups sued. "The FHFA has taken an aggressive stance on this issue in a way that has harmed minority communities. The public deserves to know why," said Linda Lye, a staff attorney with the ACLU of Northern California.

Members of the financial industry have said they fear using eminent domain could be a slippery slope, and penalizes people who save and invest in mortgage-backed securities.

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