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 proposals.

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:

• It 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.
• The limited focus of the proposals would selectively assist only those whose mortgages that provide the best returns to the promoters.
• The 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.