MoodyÕ: Stopping eminent domain seizures of underwater mortgages a credit positive

Bill that would thwart municipal seizures good for RMBS

The House of Representatives’ Appropriations Subcommittee approved a bill last week for Transportation, Housing and Urban Development appropriations for the fiscal year ending 30 September 2016.

If passed, the bill will deter municipalities from using eminent domain to seize underwater mortgages from residential mortgage-backed securities transactions at distressed prices in 2016, a credit positive for RMBS.

Moody’s Investors Service says in a client note that if municipalities were able to use eminent domain for such seizures in private-label RMBS, as they have discussed in the past few years, losses for those RMBS would increase.

The bill includes a provision that would nullify the key exit strategy to make the eminent domain plan profitable for its proponents.

The provision would prevent the Federal Housing Administration, the Government National Mortgage Association and Department of Housing and Urban Development from using funds to “insure, securitize, or establish a Federal guarantee of any mortgage or mortgage-backed security that refinances or otherwise replaces a mortgage that has been subject to eminent domain condemnation or seizure, by a state, municipality, or any other political subdivision of a state.”

Proponents of the eminent domain plan reportedly hoped to use eminent domain to force distressed sales of underwater loans and replace them with smaller government-insured mortgage loans that could be sold at a substantial profit.

The bill, which appropriates funds for the agencies for fiscal 2016, would prevent key government agencies from making loans available for such purposes during that time period.

Afterward, no such restriction would apply unless Congress enacts similar legislation the following year. The 2015 Omnibus Appropriations Bill, which became law, included a similar provision restricting the use of agency funds in 2015.

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