Officials in one of the worst housing markets in the country are considering seizing negative-equity mortgages held in private-label mortgage-backed securities in order to provide principal reduction to constituents — a notion that is sending shockwaves through the investment community. Industry groups are warning that such moves will likely only exacerbate problems in the struggling markets.
The Riverside-San Bernardino, Calif., metropolitan statistical area had a 5.16 percent foreclosure rate during 2011 — the fifth-worst of any major MSA according to data from RealtyTrac.
As of May — a month when the national foreclosure rate was sharply higher — foreclosures in the Riverside-San Bernardino area pushed the rate in the region to No. 1.
So officials have come up with a solution to the dilemna: eminent domain.
On June 19, the San Bernardino County Board of Supervisors approved an amended resolution that will empower local government to take possession of mortgages with loan-to-value ratios in excess of 100 percent through eminent domain — a process usually reserved for the development of public projects like highways. The project has been dubbed the “Homeownership Protection Program.”
Two cities located within San Bernardino County, Ontario and Fontana, also approved a resolution authorizing a joint exercise of powers agreement with the county which paves the way for the municipalities to acquire underwater residential mortgages using the right of eminent domain.
“Under one proposed plan, the targeted loans are performing underwater loans in private-label securities,” Amherst Securities Group LP wrote in an industry newsletter. “While the program as approved would be quite small, we believe this use of eminent domain sets a potentially troublesome precedent.”
As of Dec. 31, 2011, there were 11.1 million U.S. properties with negative equity, according to CoreLogic. That worked out to 23 percent of all financed residential properties. Outstanding debt on negative-equity properties totaled $2.8 trillion.
Behind the plan is Mortgage Resolution Partners, a consortium of venture capitalists out of San Francisco that stands to profit from refinancing the loans at lower balances. The group has also been pitching the program to other hard-hit areas of the country.
Amherst noted that other cities could join San Bernardino’s program, which would utilize the Federal Housing Administration’s short refinance program to finance new loans at 97.75 percent LTV.
“The Homeownership Protection Program structure would require that the local government entity take title to the loans, and pay the private-label securities trusts with money provided by Mortgage Resolution Partners,” Amherst explained. “When the loans are refinanced, the proceeds are used to repay investors who financed the Homeownership Protection Program.”
Separate letters with identical text sent to the San Bernardino County Board of Supervisors, the Fontana City Council and the Ontario City Council from 18 trade groups including the American Securitization Forum, California Bankers Association and Mortgage Bankers Association expressed “strong objection” to the joint powers agreement.
The trade groups — which also include home builders, realtors and life insurers — warn that the plan could significantly harm the very people it is intended to help: borrowers.
The agreement would likely significantly reduce access to credit for consumers in the county.
“We believe that the contemplated use of eminent domain raises very serious legal and constitutional issues,” the letters stated. “It would also be immensely destructive to U.S. mortgage markets by undermining the sanctity of the contractual relationship between a borrower and creditor, and similarly undermining existing securitization transactions.”
The trade groups explained that investors, who would bear the cost of such actions, include the retirement funds and savings of “everyday citizens.”
Loans in areas impacted by the plan would be ineligible for securitizations, while some portfolio lenders would also abandon the markets — further depressing home values in the area by limiting funding to home buyers.
The associations also expressed concern that additional information is being selectively shared on a non-public basis.
“We recognize the county’s intention to assist homeowners who are facing financial difficulties, but inappropriately, and possibly unconstitutionally, using the power of eminent domain to abrogate a contractual agreement between borrower and creditor would have far greater and lasting negative effects on existing and future homeowners,” the letter to the county concluded.
County Considers Use of Eminent Domain for Mortgages June 19
A consortium of venture capitalists out of San Francisco hopes to cash in on a proposed strategy for local governments to use the power of eminent domain to seize control of private-label residential mortgage-backed securities and cut the principal balances of negative-equity borrowers. The proposal was set for a vote Monday in San Bernardino County, Calif.