Some of the leading mortgage investors in the USA are teaming up to oppose a plan proposed by Californian local governments to buy distressed mortgages and keep the affected homeowners in their homes. Talking numbers, there are eighteen investment trade groups (like the Association of Mortgage Investors, Securities Industry and Financial Markets Association, Investment Company Institute and American Bankers Association) who have jointly written a letter to the city governments of Fontana & Ontario, and the county of San Bernardino, that the plan can do more harm than good, since it has the potential to scare away future mortgage financing in these areas.
San Bernardino County and some of the towns it comprises have set up a joint authority that uses the power of eminent domain to compulsorily buy distressed mortgages. Instead of evicting homeowners via foreclosure, the public-private entity would give them fresh mortgages with lower debts. The letter mentioned that the 18 organizations are of the opinion that the contemplated use of eminent domain raises grave legal and constitutional concerns. The union is of the opinion that it would be destructive to US mortgage markets as this move would undermine the sanctity of the contractual relationship between the borrower and the creditor, similarly undermining existing securitization transactions.
The letter also mentioned that his kind of an action would significantly limit the access to credit for mortgage borrowers in San Bernardino and other areas where similar actions would be undertaken. The concept of using eminent domain to buy underwater mortgages is being heavily advocated by Mortgage Resolution Partners, an organization backed by West Coast financers. Through the years, governments have been using eminent domain authority to seize land for building highways and bridges, or to clear urban slums. However, this is a very controversial right as landowners hardly have any negotiating power. Also, in this case, the situation is even more controversial since the power has till date never been used to seize mortgages that were held by private investors or financial institutions.
According to the union of 18 organizations, if eminent domain was used to seize loans, investors in these loans (via mortgage backed securities or their investment portfolio) would suffer losses immediately, and would also not be too keen to give future funding to borrowers in these areas. They are also of the opinion that the program can cause loans to be excluded from securitization and some portfolio lenders can even withdraw from these markets. Hence, the program can actually reduce the value of homes in the country, at a time when the government is trying everything to revive the economy. Head of Mortgage Resolution Partners Steven Gluckstern stated that the group is also having a word with local officials across different locations in California, Nevada and Florida regarding the usage of eminent domain to seize underwater mortgages. He is also organizing what can be called a mini road show to sell the idea, which is also being backed by Yale university economist Robert Shiller.
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