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The prospect of San Bernardino seizing underwater mortgages under the auspices of eminent domain remains unlikely to happen.
However, mortgage bond investors are so concerned with the prospect, they are warning that such a program could actually achieve the opposite of its intention.
The entire initiative could actually have devastating economic impacts on the very communities it is meant to save, they say.
Steven Gluckstern, the chair of Mortgage Resolution Partners, which would act as custodian to these seized mortgages, told me week ago that housing is only one economic problem the cities in San Bernardino face. "There are lots of reasons these communities are devastated," he said. So, there is no doubt that these communities are at risk and help is badly needed.
In a note, Henderson Global Investors is arguing that seizing mortgages may make matters worse, partially in that investors will not want any part of the mortgage bonds, unless there is a higher pay out. This means a higher cost of lending, if lenders even wish to originate mortgages in communities that are authorized to take them away.
"First, only mortgages with up-to-date payments will initially be considered for purchase, thereby doing nothing for the most troubled households," reads the latest economics posting to the Henderson website.
"The second major concern is that credit will be less forthcoming in future in the areas where the scheme is implemented, and that house prices could fall even further. "
"A related worry is that investors in mortgage securities will demand higher interest rates, or even abandon the market entirely," the post concludes.