RBS: Underwater mortgages hold steady without eminent domain
A majority of underwater borrowers who would qualify for proposed government programs using eminent domain to seize the loans and write down principal, are still current on their mortgage, according to research from the Royal Bank of Scotland (RBS).
RBS analysts looked at the amount of homes backing privately securitized mortgages in San Bernardino County, Calif.; Suffolk County, New York; Chicago; and Berkeley, Calif.
City councils in each area are considering plans to seize underwater mortgages through eminent domain. The money would come from private capital raised by investors, led by Mortgage Resolution Partners.
Mortgage bond investors would lose out on the deal as the governments plan to pay below fair market value to buy the loans out of the pools, especially if the borrowers showed they can still make the payments anyway.
"Default rates for these deeply underwater borrowers have decreased over time in every region studied," according to RBS analysts.
In San Bernardino County, for example, a total of 26,301 underwater mortgages were underwater but went 30 days delinquent only once over the previous year. These would have been eligible for the eminent domain program. After a year, less than half were still current on the payments.
But 14,378 mortgages would have qualified for the program as of June 2011. Of these, 81% remained current one year later (click on the graphs below to compare).
As of June, slightly more than 14,000 underwater mortgages in San Bernardino County could qualify for the program, but if home values continue to improve and borrowers remain steady on their mortgages as they've displayed, there may be no need for such a controversial program, according to RBS.
The improvement was nearly the same in the other areas. But in Chicago, the largest area considering the proposal, the program would show little effect. In June 2011, slightly fewer than 4,000 underwater mortgages would have qualified for the program, and one year later, 80% of them are still current, according to RBS.
"Falling home prices in Chicago are creating more deeply underwater homeowners and therefore increasing the number of loans that qualify for the program. The good news is that even with home prices further declining, default rates in Chicago are also declining," analysts said.
The program, like other foreclosure prevention initiatives, has been slow to get off the ground.
The Berkeley City Council sent a letter to the Alameda County sheriff asking him to freeze evictions until it could be determined who owns the mortgages. The city also informed the sheriff to convene a working group to discuss the legal options for using eminent domain if homeowners requested it to seize the loan and offer a write-down.
"Some county jurisdictions are exploring other strategies including eminent domain to enable homeowners to stay in their own homes," wrote Berkeley City Councilman Kriss Worthington in the letter.
When asked whether he would oblige the city council in halting foreclosures, Sgt. J.D. Nelson, a spokesman for the Alameda County Sheriff's Office said, "No."
"The sheriff has long said he does not want to go to federal prison for not enforcing a judge's orders," Nelson said in an interview.
However, some government officials are considering the eminent domain option.
San Bernardino is moving the program into the adoption stage, according to reports.
Other counties hard hit by the foreclosure crisis are proceeding cautiously. Officials in New York's Suffolk County said they will wait until San Bernardino makes a decision. The Chicago City Council will hold a meeting soon to discuss the idea. A Clark County, Nev., official, who represents the Las Vegas area told HousingWire they are not considering the use of eminent domain.
"Let the data speak for itself. Local government officials should decide whether these numbers and trends necessitate invoking eminent domain in their communities," RBS analysts wrote.