Proposal to Seize Underwater Mortgages via Eminent Domain not Well Received

The Board of Supervisors in the California county of San Bernardino has,rnperhaps unintentionally, picked a fight with some of the giants of the realrnestate industry.  The Board unanimouslyrnapproved a plan two weeks ago that would use eminent domain to seize underwaterrnmortgages and restructure them for homeowners unable to sell or refinance the properties.</p

The Homeowner Protection Program, in which San Bernardino would partner withrnthe cities of Ontario and Fontana within its borders, is only broadly sketchedrnout at present but it has already provoked a strong reaction from the Securities Industry and Financial MarketsrnAssociation (SIFMA).  SIFMA claims tornrepresent the interests of hundreds of securities firms, banks and assetrnmanagers.  The trade association firedrnoff a letter to the Board on Friday, cosigned by more than a dozen of itsrnmember organizations, protesting the proposed actions.  “Based on publicly available information onrnthe Agreement,” the letter said, “we are very concerned that the goodrnintentions of the Board of Supervisors will instead result in significant harmrnto the residents the Agreement intends to help.” </p

The thrust of the letter is that such an action as proposed in SanrnBernardino would significantly reduce access to credit for mortgage borrowers.  “If eminent domain were used to seize loans,rninvestors in these loans through mortgage-backed securities or their investmentrnportfolios would suffer immediate losses and likely be reluctant to providernfuture funding to borrowers in these areas. rnIt is essential to remember that investors in mortgage-backed securities</bchannel the retirement and other savings of everyday citizens through theirrninvestment funds.  This program may causernloans to be excluded from securitizations, and some portfolio lenders couldrnwithdraw from these markets.  In otherrnwords, this program could actually serve to further depress housing values inrnthe county by restricting the flow of credit to home buyers"</p