Radical Method Proposed for Restructuring Mortgages Has its Detractors, Proponents
Both mortgage credits and investors in residential mortgage-backed securities (RMBS) could take a significant hit should California jurisdictions decide to pursue one of the more radical methods proposed for addressing the lingering housing crisis and begin seizing mortgages through eminent domain, bankers and bond rating agencies are warning.
Of particular concern are proposals that focus on borrowers who are current on their existing mortgage obligations and who would otherwise continue performing as expected but for the ability to restructure their mortgage via eminent domain, a legal principle giving states the authority to seize a citizen's rights in property with due monetary compensation, but not necessarily with the owner's consent.
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The board of supervisors of San Bernardino County recently voted to form a joint powers authority with area cities to explore using eminent domain to seize mortgages on underwater homes and restructure the loans to reflect current home values. Fontana, CA and Ontario, CA joined the joint powers authority.
Because eminent domain provides a mechanism for local, county, or state governments to seize mortgages at their market values, the holders of those seized loans could experience losses if these communities proceed.
"The radical use of eminent domain to take over underwater mortgages could cause a spiraling effect of withdrawal of mortgage credit, declining home values and a threat to local economic recovery," wrote David H. Stevens, president and CEO of the Mortgage Bankers Association, in an op-ed column in The San Bernardino Sun this week. "Rather than taking actions which increase uncertainty, reduce the availability of credit and focus on the problems from the past, policymakers should look to homebuyers of the future and do what they can to efficiently get the process moving again."
"If eminent domain were used to seize loans and force losses on mortgage investors, it would set a dangerous precedent that could dry up credit for mortgages in San Bernardino County," Stevens argued. "Investors in mortgage-backed securities would suffer immediate losses and likely be reluctant to provide future funding to borrowers in these areas."
The Securities Industry and Financial Markets Association (SIFMA), which represents hundreds of securities firms, banks and asset managers, also came out against the proposals. It has said that that it would look to excluded Fannie Mae, Freddie Mac, and Ginnie Mae loans originated in jurisdictions that exercise their power of eminent domain to acquire mortgage loans.
Still, with the protracted problem in housing values proving resistant to other solutions, the proposal has its backers.
"SIFMA's decision is entirely unwarranted by its own purported purposes, and its decision - if carried out - would violate a number of consumer protection laws," argues Mortgage Resolution Partners (MRP), a community advisory firm working to stabilize local housing markets and economies by keeping as many homeowners with underwater mortgages in their homes as possible.
MRP is run by Graham Williams, CEO, who was previously a senior vice president and director of residential lending at Bank of America in the 1990s, and CEO of a $4 billion federal savings bank during his tenure with ITT Financial Services.
MRP's approach included voluntary participation on the part of the homeowner and would target loans trapped in private securitization trusts and avoids mortgages whose owners have broad powers to reduce principal, such as banks and government agencies.
According to Fitch Ratings, because San Bernardino is the largest county (by area) in the country, the impact of its decision could be broad. In these three areas of California combined, $14 billion worth of non-agency mortgages and more than 46,000 of the loans have mark-to-market combined loan-to-value (MTM CLTV) ratios of more than 100%. Roughly half of those underwater mortgages are current.
One proposal indicates that only those current and delinquent mortgages, not those in foreclosure, would be acted on.
If the usage of eminent domain were to proceed, it could be adopted in other regions and have a significant impact on the RMBS sector, Fitch Ratings said.
In California alone, there are over 590,000 non-agency borrowers with MTM CLTVs more than 100%, for an aggregate $241 billion in debt.
Across the entire U.S., the figure climbs further to 2.2 million borrowers and $589 billion underwater.
In addition to pushing forward losses on performing loans, such a program could also have other unintended consequences including negatively affecting mortgage interest rates and credit availability in affected areas, Fitch Ratings said.
Likewise, the implementation of this program could further weigh on private investor confidence and appetite for private-label mortgage-backed securities going forward, it added.
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