The Structured Finance Industry Group filed a legal brief today in support of Wells Fargo’s lawsuit against the City of Richmond, California’s plan to use eminent domain to seize underwater mortgage loans from private label securitizations trusts.
SFIG is the latest securitization industry voice that challenges the plan as unconstitutional. The group also outlines concerns over the permanent damage eminent domain will have on the U.S. home mortgage system.
On Aug. 8, the Federal Housing Finance Agency said that it may direct Fannie Mae and Freddie Mac to "limit, restrict, or cease business activities within the jurisdiction of any state or local authority employing eminent domain to restructure mortgage loan contracts."
“Allowing this type of practice is a short-sighted and unconstitutional ideal,” said Richard Johns, executive director of SFIG. “Not only would it do irreparable damage to the private mortgage market, undermining Congressional efforts to encourage private capital in the market, but it would also actually injure the local residents these efforts are supposed to be helping.”
The City of Richmond's proposal, which was developed, in part, by Mortgage Resolution Partners LLC (MRP), would relieve certain borrowers from potential future losses, which would be transferred to RMBS investors. The plan targets predominately performing home mortgages that have values that are less than their outstanding loan balances.
Under the proposal, the City of Richmond would pay lenders approximately 75%-80% of a home's fair market value, irrespective of the amount of money still owed on the related mortgage.
Standard & Poor's said this week in a report that it believes the use of eminent domain by the City of Richmond could establish a precedent that other municipalities around the country may follow.
The overall exposure of outstanding S&P-rated non-agency RMBS transactions to Richmond is limited; of the 1,000-plus transactions identified as containing Richmond-originated loans, 98% had less than 1% exposure to these loans, and no transaction had greater than a 2.5% exposure, according to S&P.
However S&P said that the city sets a precedent for other jurisdictions with “significant populations of underwater performing mortgages.”
According to a JP Morgan report other municipalities currently looking at eminent domain include North Las Vegas, Nevada; and the Californian cities of Pomona, Orange Cove and San Joaquin. Altogether the jurisdictions have less that $2 billion of underwater outstanding loans.
North Las Vegas, which JP Morgan said has $1 billion of loans that could see eminent domain, voted 4 to 1 in June to begin identifying target properties that could be seized.
S&P said that the renewed interest in the plan and more specific discussions involving the City of Richmond means it must is update views on the potential impact to outstanding securitization trusts, as well as the implications for ratings on future securitizations
Default and loss severity assumptions, for example, currently are not calculated on data that includes losses originating from eminent domain proceedings. S&P said it would likely also require the affected jurisdictions to increase the credit support provided to loans included in RMBS deals.