Point of View
David H. Stevens
Posted: 07/22/2012 07:04:38 AM PDT
California, once ground zero of the housing crisis, is and will continue working its way back to a stable real estate finance market.
However, the radical use of eminent domain to take over underwater mortgages could cause a spiraling effect of withdrawal of mortgage credit, declining home values and a threat to local economic recovery. Rather than taking actions which increase uncertainty, reduce the availability of credit and focus on the problems from the past, policymakers should look to homebuyers of the future and do what they can to efficiently get the process moving again.
The “property seizure program” allows local governments to use their eminent domain power to “condemn” underwater mortgages, pay the lender at the current market value, then repackage the mortgage for investors to purchase at the lower value. Legalities aside, the plan to seize mortgages does not take into account the enormous negative impact to current and future homeowners, the real estate finance market, home values and the many Americans who have retirement savings. Should this plan go into effect, the impact would ultimately be borne by those very homeowners and communities that the proponents of this plan claim they are trying to help.
If eminent domain were used to seize loans and force losses on mortgage investors, it would set a dangerous precedent that could dry up credit for mortgages in San Bernardino County. Investors in mortgage-backed securities would suffer immediate losses and likely be reluctant to provide future funding to borrowers in these areas.
Some loans could be excluded from securitizations, and some portfolio lenders will likely withdraw from these markets, making mortgages more expensive for all borrowers. This would also further depress housing values by restricting the flow of credit to homebuyers, stopping the housing recovery in its tracks.
Two states have attempted reactionary approaches that have failed – Illinois and Georgia – and the same end result could occur in San Bernardino County.
Cook County, Ill., imposed a process that would have required every loan application to be reviewed by the county. Georgia passed a law that would have held investors holding the mortgage legally liable for any mistakes or illegalities committed by a mortgage loan originator.
In both cases, lenders stopped providing loans in these areas as secondary market investors refused to purchase mortgages with this liability. San Bernardino County should expect a similar reaction as investors shy away from this amount of uncertainty and risk. This is not a threat; it is a reality as proven in other states.
The uncertainty also damages the market. Such government action will be viewed by investors as arbitrary and capricious. Once the government begins condemning and seizing mortgages, investors, who we depend on to buy mortgages, will likely believe that any mortgage can be interfered with and therefore the risk of loss to them will be too great to allow any loans to come from this affected market area. In short, fear of government action will likely prevent homes from being purchased and halt any chance of economic recovery.
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