Fitch Ratings: Eminent-Domain Seizures Would Damage RMBS Market

11944_dollarsignhouse Fitch Ratings: Eminent-Domain Seizures Would Damage RMBS Market Fitch Ratings has warned that the potential use of eminent domain by California localities to seize and refinance underwater mortgages would have a negative impact on the performance of private-label residential mortgage-backed securities (RMBS).

The ratings agency has responded to the recent creation of a joint powers authority by San Bernardino County and the municipal governments in Fontana and Ontario, Calif., that would invoke eminent-domain laws to take over residential mortgages and restructure the loans to reflect current home values. Fitch Ratings expresses concern over this development, stating that it presents a lose-lose situation for homeowners, communities and investors.

‘Because eminent domain provides a mechanism for local, county or state governments to seize mortgages at their market values, the holders of those seized loans could experience losses if these communities proceed,’ says Fitch Ratings. ‘Because San Bernardino is the largest county (by area) in the country, the impact could be broad. In these three areas of California combined, approximately $14 billion worth of nonagency mortgages and more than 46,000 of the loans have mark-to-market combined loan-to-value (MTM CLTV) ratios of more than 100 percent. Roughly half of those underwater mortgages are current, [but] one proposal indicates that only those current and delinquent mortgages, not those in foreclosure, would be acted on.

‘If the usage of eminent domain were to proceed, it could be adopted in other regions and have a significant impact on the RMBS sector,’ Fitch Ratings continues. ‘In California alone, there are over 590,000 nonagency borrowers with MTM CLTVs over 100 percent, for an aggregate $241 billion in debt. In addition to pushing forward losses on performing loans, such a program could also have other unintended consequences, including negatively affecting mortgage interest rates and credit availability in affected areas. Likewise, the implementation of this program could further weigh on private investor confidence and appetite for private-label mortgage-backed securities going forward.’

Fitch Ratings adds that even if eminent domain were invoked, it would be delayed through costly and lengthy legal challenges.


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