Foreclosure Crisis: Whose side are federal officials on?

On April 1st, Mayors, homeowners and advocates called on federal officials to stand with local communities, including Irvington and Richmond, over Wall Street lobbyists that have threatened illegal retaliation against their cities because of an anti-foreclosure program known as Local Principal Reduction. 

In a telephone press conference, Mayor Gayle McLaughlin of Richmond, CA, and Mayor Wayne Smith of Irvington, NJ, released two letters signed by more than two dozen local officials from across the country -- one to Mel Watt, the Director of FHFA, and one to Attorney General Eric Holder -- along with 11,000 signatures from around the country asking that the Department of Justice investigate fair housing violations by SIFMA, the leading lobby organization for Wall Street mortgage securities traders.

McLaughlin and Smith lead cities on opposite ends of the country with large populations of underwater homeowners, specifically homeowners who are people of color. Both of their cities have initiated steps toward beginning a new local foreclosure prevention program known as Local Principal Reduction or "reverse eminent domain.

“Although separated by two coasts; today Richmond and Irvington spoke with one voice," Mayor Smith said. "The friendly condemnation of toxic mortgages is necessary to save our main streets from the predatory tactics of wall street. I stand proudly with Mayor McLaughlin in the fight to keep our citizens in their homes.”

The letters were transmitted to Watt and Holder via email today and have also been sent via US Postal Service. 

Under previous leadership at the FHFA (under Watt's predecessor Ed DeMarco), officials took an aggressive stance against Local Principal Reduction in a way that harmed communities of color. The ACLU, ACLU of Northern California, ACLU of New Jersey, and the Center for Popular Democracy, on behalf of the Home Defenders League, the Alliance of Californians for Community Empowerment, and a group of community organizations, filed a FOIA request to find out why. 

“For years, cities and communities of color were targeted by predatory lending practices and sold toxic subprime mortgages, resulting in a foreclosure crisis,” said Udi Ofer, Executive Director of the ACLU of New Jersey. “Now those same cities that were targeted by predatory lending should be able to consider their full range of options to rescue homes from foreclosure, and to stabilize communities that are facing blight because of discriminatory lending practices.”

In response to the FOIA request, FHFA produced over 1,000 pages of records, detailing extensive contact between the financial industry and high-level FHFA officials. Last week, the FHFA produced another 450 pages of records. The records include a series of emails that show FHFA’s senior officials followed instructions from SIFMA, a leading financial industry trade association, to intervene when San Bernardino, California, was considering Local Principal Reduction using eminent domain solution.

John Relman, a partner at Relman, Dane & Colfax PLCC, and national legal expert on fair housing, said that it appears SIFMA and the banks have retaliated against cities that explored Local Principal Reduction as a foreclosure prevention mechanism, that illegal redlining has occurred, the banks are in violation of the Fair Housing Act, and that the illegal acts have disproportionately impacted minority homeowners.

Some key information from the FOIA request: 

  • Emails show that the industry had routine and close contact with FHFA officials, and their communications exhibited a friendly, almost intimate tone. 
  • FHFA officials followed instructions from SIFMA, a leading financial industry trade association, to intervene when San Bernardino, California, was considering the eminent domain solution. During the summer of 2012, SIFMA was particularly concerned that San Bernardino County, California, would implement an eminent domain plan.  
  • An hour after FHFA General Counsel Alfred Pollard received an email from SIFMA's top official Richard Dorfman updating him on San Bernardino, Pollard wrote back that he had “spoken with San Bernardino County this afternoon to gain more information about their intentions.” (July 11, 2012 email from Pollard to Dorfman.)  Pollard apparently felt obligated to respond quickly to SIFMA—he separately wrote to DeMarco, his boss, that he would respond because “I am trying to get him [Dorfman] off of us.” (July 11, 2012 email from Pollard to Dorfman.)  It’s also worth noting that San Bernardino officials did not perceive Pollard’s call as mere information-gathering, but understood Pollard to have been conveying the FHFA’s “thoughts and concerns” about the eminent domain program. (July 30, 2012 letter from Gregory Devereaux, San Bernardino County CEO, to Pollard.) 
  • FHFA officials followed instructions from SIFMA to announce that Fannie and Freddie would take aggressive action against communities using eminent domain.  During the summer of 2012, Dorfman wrote Ed DeMarco, then-Acting Director of the FHFA, as well as a number of other officials, that SIFMA remained strongly opposed to the use of eminent domain for principal reduction, which, in SIFMA’s view would “portend[] ruinous consequences to a range of US financial institutions.”  Accordingly, he “urge[d]” DeMarco to “engage promptly in whatever actions would be necessary to exclude from acquisition-guarantee and/or securitization” by Fannie and Freddie any loans that had been acquired through eminent domain.  The statement that FHFA released in August, 2013, went even further, when it wrote that FHFA might direct Fannie and Freddie “to limit, restrict or cease business  activities within the jurisdiction of any state or local authority employing eminent domain to restructure mortgage loan contracts.” 
  • FHFA does not appear to have performed substantial independent research in formulating its position on eminent again.  Included among the research materials that it produced  was a Wikipedia article on “Eminent Domain.”
  • Finally, while the FHFA had extensive email, phone, and in-person contact with the financial industry over eminent domain proposals, the FHFA has produced no comparable communications reflecting concern about the impacted homeowners and communities who were exploring the eminent domain solution.


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