The so-called cromnibus appropriations bill passed by the House late Thursday included a little-noticed provision that would make it more difficult for municipalities to use eminent domain to condemn and seize underwater mortgages.

The massive $1.05 trillion spending bill would ban the Federal Housing Administration from refinancing loans that have been seized via eminent domain. The bill is expected to be passed by the Senate soon.

Proponents of eminent domain such as San Francisco-based Mortgage Resolution Partners were planning to use FHA-insured loans to refinance loans that have been seized by municipalities and written down to their current appraised value.

But so far, the use of eminent domain has been thwarted by industry groups like the Mortgage Bankers Association and Securities Industry Financial Markets Association, which have strongly opposed Mortgage Resolution Partners' efforts in cities like Richmond, Calif., Las Vegas and Newark, N.J.

Fannie Mae and Freddie Mac are not allowed to finance loans involved in an eminent domain takeover.

But Department of Housing and Urban Development officials have declined to take a position on the issue, contending they would have to consider the circumstances when actually presented with an application to refinance a mortgage seized via local governments exercising eminent domain.

Language in the spending bill says it "prohibits funds for HUD financing of mortgages for properties that have been subject to eminent domain."

The inclusion of this language was welcomed by SIFMA.

"We are very supportive of Congress taking that position. By congress preventing FHA involvement, it restores certainty and confidence to the mortgage market and securitization," said Dave Oxner, managing director of the group.

The MBA has supported a prohibition for a number of years, according to chief lobbyist Bill Killmer.

The use of eminent domain to achieve principal reduction would have created capital market implications, Killmer said.

Municipalities that resorted to eminent domain would have turned into "no-fly zones," he said, where lenders would not finance new mortgages.

Other FHA-related provisions in the $1.05 trillion spending bill would block the agency from implementing its housing counseling program known as Homeowners Armed with Knowledge (HAWK) and from imposing a 4-basis-point fee on each newly insured mortgage to pay for upgrading its computer systems.

— Bonnie Sinnock contributed to this story.

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