That Eminent Domain Thing
I have a concern that politicians and citizens do not understand the importance of banks. 90% of the money in banks belongs to depositors. 10% belongs to the investors. Beating up on the banking system and the people who invest in home loans is a great way to extend indefinitely dismal economic growth. I wanted to write about the eminent domain issue because it could have an effect on home loans and home loan rates. My good friend Rob Chrisman, an industry commentator, wrote the following piece. You can read Rob's work and subscribe to his newsletter at: http://www.robchrisman.com/
em·i·nent do·main: Noun - "The right of a government or its agent to expropriate private property for public use, with payment of compensation."
It is a dangerous combination: a law firm trying to get some publicity, a city that declared bankruptcy, and public opinion that a) is against mortgage banking, and b) doesn't really understand what this could mean. Recently California made headlines, and the home loan industry & investors shudder, when eminent domain was discussed as a way to seize home loans out of pools by San Bernardino.
Typically, eminent domain has been used to clear property for infrastructure projects like highways, schools and sewage plants. But supporters say that giving help to struggling borrowers is also a legitimate use of eminent domain, because it's in the public interest.
Under the proposal, a city or county would sign on as a client of Mortgage Resolution Partners (MRP), and then condemn certain home loans. The home loans are typically owned by private investors like hedge funds and pension funds. Under eminent domain, the city or county would be required to pay those investors "fair value" for the seized home loans. So MRP would find private investors to fund that.
Of course, the question is, "What is fair value?" The value to you, or to me? Most folks see this going nowhere - it is so drastic even the politicians may see the huge negative impact of condemning hone loans. But officials from San Bernardino County and cities of Fontana and Ontario have created a joint powers authority to consider what role local governments could take to stem the fact that homeowners saddled by large home loan payments might stop making payments, if they haven't already, be foreclosed upon, and lose their homes.
The idea was broached by a group of West Coast financiers who suggest using the power of eminent domain, which lets the government seize private property for public use. In this case, they would condemn troubled home loans so they could seize them from the investors who own them. Then the home loans would be rewritten so the borrowers would have significantly lower monthly payments. The chairman of the San Francisco based group, in an interesting public relations move, said that his main concern is to help the economy, which is being held back by the home loan crisis. "This is not a bunch of Wall Street guys sitting around saying, `How do we make money?'" he said. "This was a bunch of Wall Street guys sitting around saying, `How do you solve this problem?'"
"Not so fast" say investors that paid good money for these loans in these pools. And without investors, where would loans and pools of loans go? Home loan investors are fighting this plan to use government powers to seize the home loans of "underwater" borrowers. If rolled out across the US, the proposal to use powers of compulsory purchase ("eminent domain") could force banks and home loan investors to realize significant losses on their portfolio of mortgage bonds. And do the markets really need that?
The use of eminent domain forcibly to purchase loans on homes where borrowers owe more than their property is worth can take things to a whole new level. The borrowers would then be given a new home loan, with reduced debt. City officials say that this could help restore the financial health of the region, which has been blighted by the sharp drop in house prices over the past six years.
But home loan investors are up upset with this plan proposed to the county by MRP, a group advised by Westwood Capital and Evercore Partners. Investors believe it could set a precedent to be used across the US and, as eminent domain requires paying compensation only at the current - depressed - prices, force them to take losses.
The American Securitization Forum, a collection of the biggest home loan investors, is sending a letter on Friday to San Bernardino County officials to express "strong objections" to a "shortsighted and ultimately counterproductive" proposal. "We feel like the sanctity of our contracts are being violated," said Paul Jablansky, an investor at Western Asset Management, a large buyer of mortgage bonds. The foundation of securitizations is the pledge that the assets (in this case home loans) are legally isolated in a trust that issues the bonds. "If the eminent domain process occurs successfully, it would set a precedent for the credibility of all securitizations. How can investors get confident that the assets they believe are underlying a security will be there?"
This will, no doubt, be dragged into court, with the costs eventually being borne by future borrowers. In the meantime, investors are spooked. And when investors are nervous, whether about agency or non-agency loans, they tend to lower prices, which in turn raise rates. And do we really need that for home loans?
Dick Lepre
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
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The use of prestigious sector intentionally to purchase loans on houses where people owe more than the house or home is value can take things to a whole new level.
Posted by: home insurance jacksonville fl | July 26, 2012 at 08:13 AM