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Eminent Domain & Housing – The Sword of Damocles Remains Overhead

Report by Jonathan Woloshin, CFA, analyst, UBS FS jonathan.woloshin@ubs.com. Read the original report here.

  • gty_bank_owned_home_richmond_ll_130801_16x9_608The city council of Richmond California recently approved the use of Eminent Domain to seize/refinance underwater from private label mortgage backed securities.
  • Implementation remains uncertain as numerous legal challenges have been brought by numerous parties.
  • We continue to believe the use of Eminent Domain to seize mortgages from MBS structures would be a significant negative for the housing market and a strong deterrent to private capital re-entering the residential mortgage market.

Over the past 18 months we have written extensively about the proposed use of eminent domain (ED) to seize and restructure underwater mortgages from private label mortgage backed securities. Although ED has ultimately been rejected in a number of municipalities (most recently in North Las Vegas, NV), the City Council or Richmond, California became the first municipality to continue pursuit of the plan after undergoing consideration of the full city council. Given the myriad legal challenges pending against the proposal, resolution is not likely in the near future. That said, we remain extremely concerned that should ED be successfully implemented, there would be severe negative implications for residential mortgage financing going forward. In particular we believe private capital would be very reticent to re-enter the market given the heightened risks posed by ED. Given the government’s desire to reduce the current 85%+ federal share of mortgage underwriting, we believe using ED as proposed in the housing market runs completely counter to those goals.

In a 9/1/2013 editorial posted on InsideBayArea.com by Chris George, President of East Bay Mortgage Banker CMG Financial

“The lifeblood of any healthy housing market is access to affordable credit for borrowers. If we lose the backstop that the federal government provides through Fannie Mae and Freddie Mac, there will be a severe reduction in the ability of well-qualified borrowers to get a mortgage. No lender in his right mind would offer a loan if he knew the city would likely seize it if the value of the home dropped below the loan amount. And if they did extend credit, that risk would be felt in much higher costs, essentially killing our local housing market.”

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We believe the above quote succinctly and accurately frames the risks associated with ED and the mortgage market. We will continue to closely monitor the situation and provide updates as warranted.

This report has been prepared by UBS Financial Services Inc. (UBS FS). Please see important disclaimers and disclosures below.

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