NEW YORK, Aug 5 (Reuters) - The city of Richmond, California's decision on July 30 to potentially use eminent domain to seize "underwater" mortgage loans is credit negative for U.S. residential mortgage-backed securities, Moody's Investors Service said Monday.
If the northern California city successfully executes its plan, it would "encourage other cities to adopt similar plans that would increase losses on RMBS," the rating agency said in a report. The agency added that losses would be "significant" if the plan were to become widespread.
Rising home prices make it unlikely that Richmond and other cities will successfully enact eminent domain, however, Moody's said, since improving prices reduce the likelihood that borrowers will default. A mortgage is underwater if its unpaid balance is greater than the fair market value of the home.