Everything was going smoothly at Julian Castro's confirmation hearing to run the Department of Housing and Urban Development, until eminent domain came up.
The San Antonio mayor told members of the Senate Banking Committee that he would support their efforts to pass legislation that strengthens the Federal Housing Administration mortgage insurance program. He also pledged to work with the committee to pass a bill that would wind down Fannie Mae and Freddie Mac and create a new housing finance system.
"If I am confirmed, I look forward to be an active participant as the Senate continues work on this legislation," Castro said Tuesday morning.
But when Sen. Patrick Toomey, R-Pa., asked the HUD nominee about cities using eminent domain to condemn mortgages, the atmosphere got testy.
The GOP senator said he wanted to know if Castro would keep the FHA from participating in refinancing mortgages that are "confiscated using eminent domain." Some cities have sought to use eminent domain to condemn underwater mortgages where the servicers have not provided the borrowers any relief.
"This is an issue of first impression for me," Castro said. "It is not something that the city of San Antonio has tried."
The nominee noted that eminent domain has not been used in any city so far. Yet it has generated a lot of litigation. He said he understands why mortgage lenders are concerned about the issue but that he also understands the other side of the debate.
"I can understand why communities with a whole lot of folks underwater might think of this method," the HUD nominee testified.
So far, HUD has not taken a position on eminent domain. And Castro pledged to consult with banking committee members before taking a stance.
"If I am confirmed, I would look forward to visiting with you and committee members on what HUD's programmatic response ought to be," Castro said.
That did not satisfy Sen. Toomey.
"I think senators ought to know what you views are on eminent domain," he said.
When Castro repeated his pledge to consult with committee members, the GOP senator said, "I see that I am not going to get an answer to my question."
On the subject housing finance reform, the HUD nominee promised to get up to speed quickly on reform of the government-sponsored enterprises. He noted that the senators are still trying to bring get a GSE reform bill to the Senate floor for a vote this year. "The current conservatorship of Fannie and Freddie is not sustainable," Castro said.
The current HUD secretary Shaun Donovan has devoted a lot of time working with the banking committee members on GSE reform. President Obama has nominated Donovan to be the new Office of Management and Budget director.
Castro also testified that the FHA should play a "strong role" in providing homeownership opportunities for first time homebuyers and people of modest means who are creditworthy.
But he also pledged to strengthen and recapitalize the FHA mortgage insurance fund so that it doesn't need another $1.7 billion government infusion.
"I share with you a commitment to ensuring that the FHA has a positive capital reserve ratio," Castro told Sen. Mike Crapo, R-Idaho. "It is on the right track and it does not need another mandatory appropriation."
Castro is unlikely to deviate materially from Donovan's FHA strategy, says Washington policy analyst Isaac Boltansky.
"We continue to believe that the FHA will not reduce its mortgage insurance premium before the Mutual Mortgage Insurance Fund clears the Congressionally-mandated 2.0% capital threshold," Boltansky wrote in a June 16 report.
Since the President announced that Castro would replace Donovan at HUD there have been no signs of serious opposition to the Hispanic mayor's nomination.
It also difficult for Republican senators to block confirmations since the Democrats changed the 60-vote filibuster rule in January. It only takes 50 votes to confirm cabinet officials.