The idea of seizing the mortgages of underwater borrowers in San Bernandino is back in the headlines via an article in The Wall Street Journal.
The argument is that this is for the greater good of the concerned communities, as with any other eminent domain program.
“We are helping clean out a system that is broken,” said Steven Gluckstern, chairman of Mortgage Resolution Partners, the architect of the program. “I believe we can deliver America’s homeowners,” he told me in an interview two weeks ago.
Since then, however, the issue is becoming even more contentious. Amherst called the idea unfair last week, for starters. Then I get this in an email from Madeline Schnapp, director of macroeconomic research at TrimTabs Investment:
“What gives the right of a public entity to ‘seize’ private property for private use by a private entity whose sole purpose is to turn a profit all for the ‘common good?’ Whose common good? Not the common good of the holders of the original MBS, but certainly for the common good of San Francisco-based Mortgage Resolution Partners.”
So that pushes the question of how much of the community can MRP reach with this plan?
San Bernardino County and the cities of Ontario and Fontana approved a resolution establishing a joint exercise of powers agreement to enable this activity. A third city, which originally expressed interest, has since dropped out.
The idea is that local governments can reverse the decline of their communities, since economic vitality is badly impacted by negative equity.
Analysis firm DBRS released a note to clients about the anticipated reach of the program, if successfully implemented, which suggests the impact might be somewhat muted.
DBRS says 44% of mortgages, or approximately 150,000 homes, in San Bernardino County are underwater. Of the 150,000 mortgages, 20% are held in private-label mortgage-backed securities.
So, that’s a maximum number of 30,000 mortgages that can benefit from this program.
Regardless of the proposed private funding of the program, “losses would be immediately passed through on the transactions as write-downs reducing the cushion against future losses and potentially causing downgrades,” the DBRS analysts add.
But there are larger concerns that go beyond the nameless, faceless RMBS investor. For one, MRP would use automated valuation models to value the properties. DBRS said AVMs are seldom very accurate because they do not include any internal or external assessment of the home similar to an appraisal.
Some macroeconomists also aren’t thrilled about the proposal.
TrimTabs’ Schnapp doesn’t like that rather than allowing the free market to determine the price of housing for private individuals, “government entities are using government coercion to determine, by fiat, housing prices and use the vehicle of eminent domain to remove property rights from private individuals.”
“The government, not the free market, is now the arbiter of what is fair ‘for the common good’ all because a handful of local officials say the housing bust has created a public blight,” Schnapp said. “This process has the potential to become highly political and by extension corrupt.”