The Securities Industry and Financial Markets Association launched the latest salvo against the concept of using eminent domain to seize underwater mortgages.

As reported earlier, city proposals to seize underwater mortgages using eminent domain may only affect a small percentage of privately securitized loans if successful. Investors and other ABS players I spoke to today are buzzing with the idea. Some confirm that they feared these mortgages could find their way to the to-be-announced bond market. 

SIFMA is the gatekeeper for bonds entering the TBA market. However, the Federal Housing Administration refis for the eminent domain can still be traded in the larger secondary markets.

Despite the small size of the eminent domain scope, we should keep the context that it is the thought that counts.

“While only a small pool of loans is currently being considered, the precedent is the issue," said Byron Mims, vice president, asset backed securities team at Smith Breeden. Steven Gluckstern, the chair of Mortgage Resolution Partners would disagree that the program could not help entire communities. MRP would act as custodian to the mortgage seizures. He estimates that 90% of the delinquent borrowers in the relevant counties will default on the mortgage in the next four years. However, MRP would only pick performing mortgages, hardly those households hardest hit by the housing crises.

"The MRP plan cherry-picks the loans most likely to be sold at a profit," he adds. "It deliberately avoids the most vulnerable borrowers — those that are actually delinquent."

MRP would like it to become more than a talking point, to be sure, but that future is not very likely.

"MRP would like to roll this business model out nationwide, but I think only a few municipalities will eventually adopt this method of dealing with the housing crisis,” Mims said.

Still, it's an interesting thought.