A plan local governments are considering to seize underwater mortgages out of investor bonds through eminent domain now targets home loans already delinquent or in default, according to lead investors in the proposal.

The private firm Mortgage Resolution Partners, would put up the cash to acquire the mortgages via eminent domain, write down principal and refinance the loan into a new one backed by the Federal Housing Administration. The proposal only targeted loans that were still current. But the company said Friday interested municipalities requested plans to seize distressed mortgages as well.

A collection of 25 housing industry trade groups sent a letter to the Federal Housing Finance Agency Friday, renewing concerns that the program would only make mortgage lending more expensive and less available in the future. The groups, which include the Securities Industry and Financial Markets Association, the American Securitization Forum and the Mortgage Bankers Association, also showed how much MRP investors could profit off of eminent domain.

MRP, which calls itself a community advisory group, could make a 30% profit after paying 80 cents on the dollar for the loans and pocketing securitization proceeds when the new loan is refinanced into a Ginnie Mae bond, according to the trade group letter (click the chart below to expand).

Negative equity remains one of the largest drags on the housing recovery and the overall economy. Roughly 43% of all borrowers in San Bernardino County are underwater, according to CoreLogic (CLGX). But analytics firm Clear Capital showed earlier in the week the local market there is early on the mend.

MRP said the expanded program could assist roughly 42,000 families in San Bernardino County, where officials formally moved forward earlier in the month to consider the idea.

“The scope of this problem is just too big for us to ignore so many struggling homeowners in communities like San Bernardino,” said MRP Executive Chairman Steven Gluckstern. “After meeting with dozens of local governments around the country in the past several weeks, we realized that they want us to expand the proposed program to help more of their citizens.”

San Bernardino County and the Chicago City council officials did not immediately reply to requests for comment on whether they asked for the expansion of the proposal.

The FHFA is not on board. It threatened to prohibit Fannie Mae and Freddie Mac from financing loans in areas involved with the proposal, or at the very least raise the cost of guaranteeing these mortgages due to the increased risk posed by eminent domain.

The FHA, which would be on the hook if the newly refinanced loan defaulted – or redefaulted under the expanded program – also has concerns.

But eminent domain lawyers said courts very rarely strike down eminent domain challenges, even when such programs benefit private companies in the name of local economic development.

The trade groups are therefore stepping up efforts to stop the proposals before they get started.

“If these proposals go forward, there will be a severe, negative impact on mortgage markets, and therefore on mortgage borrowers,” said SIFMA Executive Vice President Randy Snook.


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