- The 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.”
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.
Wealth Management Research is published by Wealth Management & Swiss Bank and Wealth Management Americas, Business Divisions of UBS AG (UBS) or an affiliate thereof. Wealth Management & Swiss Bank brands its publications as Chief Investment Office, Wealth Management Research outside the US. In certain countries UBS AG is referred to as UBS SA. This publication is for your information only and is not intended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product. The analysis contained herein does not constitute a personal recommendation or take into account the particular investment objectives, investment strategies, financial situation and needs of any specific recipient. It is based on numerous assumptions. Different assumptions could result in materially different results. We recommend that you obtain financial and/or tax advice as to the implications (including tax) of investing in the manner described or in any of the products mentioned herein. Certain services and products are subject to legal restrictions and cannot be offered worldwide on an unrestricted basis and/or may not be eligible for sale to all investors. All information and opinions expressed in this document were obtained from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to its accuracy or completeness (other than disclosures relating to UBS and its affiliates). All information and opinions as well as any prices indicated are currently only as of the date of this report, and are subject to change without notice. Opinions expressed herein may differ or be contrary to those expressed by other business areas or divisions of UBS as a result of using different assumptions and/or criteria. At any time UBS AG and other companies in the UBS group (or employees thereof) may have a long or short position, or deal as principal or agent, in relevant securities or provide advisory or other services to the issuer of relevant securities or to a company connected with an issuer. Some investments may not be readily realizable since the market in the securities is illiquid and therefore valuing the investment and identifying the risk to which you are exposed may be difficult to quantify. UBS relies on information barriers to control the flow of information contained in one or more areas within UBS, into other areas, units, divisions or affiliates of UBS. Futures and options trading is considered risky. Past performance of an investment is no guarantee for its future performance. Some investments may be subject to sudden and large falls in value and on realization you may receive back less than you invested or may be required to pay more. Changes in FX rates may have an adverse effect on the price, value or income of an investment. This document may not be reproduced or copies circulated without prior authority of UBS or a subsidiary of UBS. UBS expressly prohibits the distribution and transfer of this document to third parties for any reason. UBS will not be liable for any claims or lawsuits from any third parties arising from the use or distribution of this document. This report is for distribution only under such circumstances as may be permitted by applicable law. In developing the WMR economic forecasts, WMR economists worked in collaboration with economists employed by UBS Investment Research. Forecasts and estimates are current only as of the date of this publication and may change without notice.
Distributed to US persons by UBS Financial Services Inc., a subsidiary of UBS AG. UBS Securities LLC is a subsidiary of UBS AG and an affiliate of UBS Financial Services Inc. UBS Financial Services Inc. accepts responsibility for the content of a report prepared by a non-US affiliate when it distributes reports to US persons. All transactions by a US person in the securities mentioned in this report should be effected through a US-registered broker dealer affiliated with UBS, and not through a non-US affiliate. The contents of this report have not been and will not be approved by any securities or investment authority in the United States or elsewhere.
Version as per October 2011.
© 2013. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.