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Mortgage investors raise alarm as eminent domain spreads

A number of securitization trade groups sounded the alarm when Mortgage Resolution Partners entered into contracts with two additional municipalities to form the use of eminent domain programs.

Richmond, Calif. and North Las Vegas, NV. are now said to be seriously considering eminent domain as a potentail solution to current housing woes. The plan spooked investors in the past, namely when Mortgage Resolutions Partners tried, but failed, to get a similar plan accepted in San Bernardino County.

The use of these programs is to seize or restructure underwater residential mortgages, many of which are bundled into private-backed securities. In response to such actions, industry groups sent joint letters to these municipalities voicing their concerns, according to a recent note by the law firm Dechert

The discussion of the use of eminent domain began last summer when several California municipalities began discussing the potential use of this program as a tool to kick start local housing market recoveries and assist struggling homeowners.

Under the proposals, local governments would take title to the mortgages – not the underlying real property — and pay the mortgage holders "fair market value" using money supplied by institutional investors, Dechert explained.

The government and investors would then issue new mortgages to homeowners by writing down the loan amounts so that distressed homeowners could lower their monthly payments and begin to rebuild equity in their homes. The restructured mortgages could then be sold to investors.

In response to the growing acceptance of this practices, groups such as American Securitization Forum, American Bankers Association and National Association of Real Estate Brokers have gone on the offensive, appealing to lawmakers and policymakers to explain why such practices may be illegal and detrimental to the local housing markets.

For example, the joint industry letters argue that in both California and Nevada, the eminent domain power of local municipalities "only permits them to take the property of private owners who are domiciled within that municipality, and certainly not from owners who are not even within that state."

Furthermore, most residential mortgages are primarily held in securitization trusts, which are likely not California entities. Additionally, the beneficiaries of these securitizations are nation and international investors who are based all over the country and the world.

The letters also reiterated the destructive power the use of eminent domain would have on housing in those local markets and on the overall economic recovery.

"The letters caution that this will inevitably lead to complicated and costly legal battles over whether these municipalities had the right to seize the mortgages in the first place, which will only hinder the ability of individual homeowners and local housing markets to recover," the law firm explained.

However, not all municipalities are rushing to embrace eminent domain.

For instance, Brockton, MA rejected a proposal to use the program because members of the Brockton working group expressed concern that the question of whether using eminent domain was permissible was not legally clear enough to warrant further discussion at that time, Dechert noted. 

"While it may be understandable and desirable that community leaders should take action to help homeowners in their jurisdictions who are struggling with mortgage payments, there are less destructive tools available than using eminent domain," the report stated.

Overall, local governments around the nation continue to ponder how best to help homeowners stay in their properties and officials are considering a variety of means of assistance.

With the legal uncertainties and potentially negative impacts of using the program, investors believe there is a need for alternative proposals for action, Dechert concluded. 

cmlynski@housingwire.com

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