Bank Bond Groups Join to Oppose Eminent Domain on Mortgages

The article by Al Yoon, is yet another illustration of the massive fall out from the mortgage crisis.  As counties and municipalities contemplate bankruptcy, many look for unique solutions for the homeowner and the community.  Is Eminent Domain the solution.

Bank Bond Groups Join to Oppose Eminent Domain on Mortgages

“Eighteen banking, securities and housing groups on Thursday issued a stern warning to three California municipalities pondering the use of eminent domain to seize troubled mortgages from investors.

The group, led by the Securities Industry and Financial Markets Association, jointly sent letters to city governments of Fontana and Ontario, Calif., and the county of San Bernardino, Calif. to object to the proposed “Homeownership Protection Plan,” telling officials that implementation would likely significantly reduce their residents’ access to home loans. The municipalities are in the Inland Empire, an area east of Los Angeles that has been particularly hard hit by the housing crisis.

The municipalities earlier this month approved a resolution that would allow them to acquire underwater mortgages under the right of eminent domain. The mortgages would then be modified to encourage and enable the homeowners to stay in the houses.

But the plan has outraged investors who own the mortgages in the form of private-label mortgage-backed securities. Using eminent domain would raise “very serious legal and constitutional issues,” and undermine the sanctity of contracts between borrowers and creditors, they say.

In doing so, the amount of credit that is offered in those areas may be reduced, exacerbating the housing problem, said the group, which amounts to an unusual alliance between banks and investors who have often been at odds over how to deal with delinquent borrowers, loan modifications and foreclosures.

“We expect that credit availability for home purchases and refinancing of all San Bernardino loans would be significantly compromised if this plan would be put into effect,” the group wrote in its letter to San Bernardino.

Also in the group are the American Securitization Forum, and top banking lobbyists including the Mortgage Bankers Association and the American Bankers Association. Investors are also represented by the Association of Mortgage Investors.

Analysts at Amherst Securities Group on Thursday said the use of eminent domain would set a troubling precedent as it targets performing loans in private-label mortgage bonds, or securities packaged by banks and other firms without federal guarantees.

The government is relying on the private mortgage capital to help reduce the role of federally backed agencies, such as Fannie Mae and Freddie Mac, that have cost taxpayers more than $150 billion since the financial crisis. Violating contracts with eminent domain would chill that process, which participants say is already stunted by persistent government competition and uncertainty over regulations.

But Steven Gluckstern, head of Mortgage Resolution Partners, which hopes to manage the program that it has been proposing to local governments, said he’d “completely disagree” with assertions that the plan would upend the mortgage industry and private securitizations that have been sidelined for years.

“There is no market now,” Mr. Gluckstern said. “We believe, like these groups, that the return of a private sector market is important for the American mortgage industry but we don’t believe that it happens until this problem (of underwater loans) is cleared.”