The Securities Industry and Financial
Markets Association (SIFMA) joined by 25 other trade associations has fired
another salvo in the mortgage eminent domain fight that originated in
California in June. The 26 organizations
sent a letter Friday to the Federal Housing Finance Agency in response to their
requests for comments on its own statement strongly opposing the eminent domain
Briefly, the cities of Chicago and
Berkley California have followed in the footsteps of San Bernardino, California
in purposing to seize performing but underwater loans in their communities out
of residential mortgage backed securities (RMBS) in order to restructure them
to reflect the current market value of the collateral. SIFMA, which has issued several
earlier statements protesting the proposals, as well as FHFA have objected
to the proposals on several grounds:
would have a chilling effect on credit extension and on investment in housing
markets. While a sliver of borrowers
might be helped, the overall market would be harmed as mortgage investors will seek
a significant risk premium to compensate for the risk of future seizure.
limited focus of the proposals would selectively assist only those whose
mortgages that provide the best returns to the promoters.
proposal itself may be unconstitutional.
Friday's letter expands considerably on each
of these concerns, including as an appendix a legal opinion on the
constitutionality of such takings. The
letter also ups the ante rhetorically and introduces a new argument; that there
is a profit motivation underlying what SIFMA calls "this Scheme."
The proposals, the letter says, would
impose losses on mortgage investors, including the retirement and savings accounts
of individual investors "in order to extract profits that would be delivered to
a small group of opportunistic investors with the added value of guarantees
given by Ginnie Mae. This plan is a
veiled short-term, opportunistic investment strategy that utilizes federal
government insurance and guarantees to achieve its goals."
The table below was provided by SIFMA to
illustrate what it called "the scale of this government-enforced private wealth
transfer." Calling the example typical,
the letter says the proposals would extract profits at the expense of existing
security holders, transferring it to others and that, on its face the
compensation that is required by the U.S. Constitution and various state laws
would not be provided to "victims" of the seizures. By way of explanation, Mortgage Resolution
Partners (MRP) referred to in the table is the entity that would obtain initial
financing for the seizure and administer the resecuritization of the loans.
The table, the letter says,
represents only one component of the total losses. In addition to the specific losses due to inadequate
compensation for a specific loan, trusts and their investors would see an
overall deterioration of the asset quality of the pool. Depending on the volume of mortgages seized
there could also be losses incurred related to adjusting or revaluing hedges
and funding mechanisms and unanticipated risks from the need to reinvest the unexpected
proceeds of eminent domain seizures.
"If these proposals go forward, there will be a severe, negative impact on
mortgage markets, and therefore on mortgage borrowers," said Randy Snook, SIFMA
executive vice president, business policies and practices. "The use of
eminent domain confronts lenders and investors with an unquantifiable new risk,
which will reduce the amount of credit available to potential homeowners and
causing irreparable damage to the recovering national housing market.
These negative outcomes will vastly outweigh any small benefits that
jurisdictions might hope to achieve using these proposals."
In addition to SIFMA the letter was signed by, among two dozen others, American
Bankers Association, American Escrow Association, Association of Mortgage
Investors, California Land Title Association, Community Mortgage Banking
Project, Mortgage Bankers Association, and United Trustees Association.