(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)
By Daniel Indiviglio
WASHINGTON, July 5 (Reuters Breakingviews) - A California
county’s new plan to seize underwater mortgages from investors
may be the most dangerous housing market intervention yet. If it
catches on, bondholders could face billions in losses – and
taxpayers, too, if local authorities start targeting loans
backed by the federal government. That would whack up mortgage
costs and may leave Washington as the only lender.
The plan is simple enough. San Bernardino county wants to
invoke existing eminent domain laws to seize mortgages that are
bigger than the current value of the homes they’re lent against.
That’s a radical departure from the way eminent domain is
usually deployed – to commandeer land for public use, such as to
build a road.
The county would then sell the loans to a fund called
Mortgage Resolution Partners. The deal is a no-brainer for all
concerned: the investment group makes a profit on the safer new
mortgages – to qualify, borrowers have to be current on their
payments. The homeowners get a loan that’s now worth less than
their home, so also end up with some equity. And the local
politicians look smart and may win some extra votes.
But that doesn’t allow for the true cost of the program.
Assume it’s implemented across the country and includes not just
private-label mortgages, as is the case in San Bernardino, but
the far larger market of those backed by the U.S. government.
That opens up the scheme to a large chunk of the $1.2
trillion-worth Americans owe on their mortgages above the
current value of their homes, according to Zillow’s
first-quarter Negative Equity Report.
That would cause enormous losses for bondholders and
taxpayers alike. At the extreme, private investors would
probably abandon any intentions of financing a private mortgage
market in the future, leaving the U.S. government as the only
entity willing to shoulder the risk.
At the very least, the successful use of eminent domain laws
to seize mortgages, even if limited to a few municipalities,
would make bondholders charge far more for the risk, pushing up
the price of home ownership – which could hit demand for loans
and send house prices down again, perpetuating the cycle of
bubbles and bailouts.
Of course, the threat of this program might light a fire
under bondholders and servicers that have been sluggish to
modify mortgages up to now. But the costs of this coercion would
easily outweigh the benefits.
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:
- San Bernardino county is working on a new program that
would use eminent domain laws to seize underwater mortgages. An
investor group, Mortgage Resolution Partners, has offered to
finance the plan.
- The plan would allow borrowers who owe more than their
home is worth to reduce their mortgage balance to levels below
their home’s current value. The program would target loans
contained in private-label mortgage-backed securities, meaning
investors holding the paper would take a loss.
- The Securities Industry and Financial Markets Association
(SIFMA) has come out in opposition to the plan. In a joint
letter with 17 other financial industry groups, SIFMA says that
the initiative would cause serious harm to credit availability
in the future.
- SIFMA and other associations' comments to San Bernardino
county on the Joint Powers Agreement of the Homeownership
Protection Plan: link.reuters.com/nax29s
- Reuters: US investor groups oppose "condemn" mortgage fix
Principal hazard [ID:nL2E8FI8K6]
Mortgage maze [ID:nL2E8D332L]
- For previous columns by the author, Reuters customers can
click on [INDI/]
(Editing by Antony Currie and Martin Langfield)
Keywords: BREAKINGVIEWS EMINENTDOMAIN/
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