Amherst Securities Group (ASG) analysts in their latest Amherst Mortgage Insight talked about the recently approved Homeownership Protection Program (HPP), which allows municipalities to acquire underwater residential mortgages using the right of eminent domain. The program is a product of a resolution approved on June 19 by California’s San Bernardino County and its two cities named City of Ontario and the City of Fontana.
ASG analysts described this as “creative use of eminent domain” that can potentially establish a “troublesome” precedent.
Analysts stated under the program, after these loans are bought at fair market value, the intent is to restructure them so that the homeowner can continue to stay in the property. The authorities are allowed to change, restructure, hypothecate, assign, pledge, securitize, convey or re-convey these loans and deeds or trust. The HPP should apply only to the loans and excludes the power to buy the homes by using eminent domain.
Although the HPP Program is currently small, ASG analysts believe that the county eventually intends for it to grow. They are concerned that this might target performing loans in private-label securities that do not have a built-in mechanism against unfair prices. They added that programs like this show the need for securitization reform. However, the lack of such reform highlights how it would be challenging and expensive for private capital to return to the mortgage market.
After making calculations, analysts found that RMBS investors have little protection built into the HPP program. They stated that if the private-label mortgages are taken out of the trust at 80% of the property’s current value — compared to their estimated value of 100% — the investor would “fair very poorly. “ Moreover, performing loans would be taken out of the trust without representation and without adequate compensation.
“The PLS investor is also losing the option that the situation will improve; default rates will continue to decline, and home prices will at some point rise,” analysts wrote. “If the PLS investor were compensated at the fair value, it would significantly reduce any profit for the HPP investors.”