The use eminent domain, by more U.S. cities, to seize underwater mortgages out of RMBS trusts would spell trouble for bondholders; but luckily cities may turn to other options to help homeowners.

Last week the city of Richmond, California contacted servicers in an attempt to buy loans out of RMBS trusts. If Richmond or other U.S. cities implement the plan created by Mortgage Resolution Partners, it would increase losses on RMBS.

The city sent notices to the trustees of the deals where the loans are securitized offering to buy 634 underwater loans totaling $242 million in balance, according to a JP Morgan securitization report.

Richmond plans to pay 80% of the market value of the home. This, explained JP Morgan, would result in about $100 million of losses to bond holders.

Fortunately for these RMBS investors, other U.S. cities are exploring alternatives that are less shocking to RMBS cashflows.  

These options are based on rising home prices, which reduce the likelihood that borrowers will default or at least reduce the ultimate losses to the bond, according to a Moody’s Investors Service report.

According to the Moody’s report, as home prices improve, borrowers have less negative equity. In Richmond, for example, highs in Loan to Values have declined since 2010 to 190% in 2013 from 240%.

One alternative to eminent domain for stopping foreclosures is to create special loan programs to enable the underwater borrowers to approach their servicers with reasonable and more attractive payoff proposals than can be achieved through foreclosure, according Ron D'Vari, CEO of NewOak Capital.

For borrowers with stable incomes, government guaranteed loans supported by reasonable current home prices may be another alternative.

D’Vari said that servicers are likely to consider borrower-initiated proposals “in lieu of foreclosure if it leads to higher recovery.”


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