Agency Asked to Explain Foreclosure Stance

(CN) - Seven community groups sued the U.S. regulator of Fannie Mae and Freddie Mac for details on its alleged efforts to block cities from using eminent domain to prevent foreclosures in neighborhoods hit hardest by the recession.

In a Freedom of Information Act lawsuit filed, the community groups seek an order forcing the agency to hand over records of its communications with the financial industry and documents discussing the use of eminent domain to help struggling homeowners.

Specifically, the groups want information on the agency's "relationship with the nation's largest financial institutions and its efforts to prevent municipalities from implementing a program to address the mortgage foreclosure crisis."

This program involves persuading lenders to sell underwater mortgages to cities at fair-market value by threatening to flex the power of eminent domain.

According to the lawsuit in Oakland Federal Court, cities began discussing this option after the independent federal agency failed to implement principal-reduction programs for loans owned by Fannie Mae and Freddie Mac. This forced local communities to come up with creative ways to help the millions of homeowners who are underwater on their mortgages, the groups say.

The city of Richmond, Calif., recently said it would use eminent domain if lenders refused to sell underwater mortgages at fair-market value.

"If eminent domain can be used in blighted neighborhoods to seize property that will be turned over to private developers, then eminent domain should also be available to help homeowners stay in their homes and to stabilize neighborhoods," said Rachel Goodman, a staff attorney with the American Civil Liberty Union's Racial Justice Program.

The ACLU and the ACLU Foundation of Northern California are representing the Alliance of Californians for Community Empowerment; Housing and Economic Rights Advocates; Urban Revival (operating as City Life/Vida Urbana); The Colorado Foreclosure Resistance Coalition; Home Defenders League; New Jersey Communities United; and New York Communities for Change.

The FHFA allegedly responded with threats of its own, saying it would take legal action against Richmond and any other city that uses eminent domain to reduce mortgage principals. It also threatened to deny credit to people seeking mortgages in those communities, according to the lawsuit.

This threat of legal action "effectively blocks the communities hit hardest by the foreclosure crisis from pursuing one potentially effective solution on behalf of their residents," the groups say.

And denying credit would hit minority communities the hardest, "as the communities most interested in eminent domain tend to have disproportionately high concentrations of African-American and Latino residents," the lawsuit states.

Linda Lye, staff attorney for the ACLU of Northern California, said the public "deserves to know why" the FHFA "has taken an aggressive stance on this issue in a way that has harmed minority communities."

The community groups seek an order requiring the agency to immediately process and make available the requested records.

"As cities explore solutions that can work for them, the FHFA should be encouraging programs to end the foreclosure crisis, reduce debt, and rebuild our economy, not clamping down on them," said Ady Barkan, staff attorney with the Center for Popular Democracy. "And it should be transparent with the American people about its relationship with the financial industry."

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