The financial industry is taking another run at a plan to help homeowners, this time the proposed program in San Bernardino County that would use eminent domain laws to acquire underwater mortgages and then refinance them for borrowers at market rates. The financial services lobbying group SIFMA said they would exclude mortgages in San Bernardino and other localities that engaged in this tactic from what is known as the to-be-announced (TBA) market. Here’s their statement:
In the TBA markets, buyers and sellers trade in a forward manner – that is, a trade executed on a given day may not settle for one, two, or even three months. Importantly, at the time of the trade, the identity of the mortgage-backed securities that will be delivered is not known. Rather, the counterparties agree on certain general characteristics of the pool, such as the issuer, coupon, term (15 or 30 years), and settlement month of the trade. This means that the collateral that falls into the various categories must be considered fungible. Investors must have confidence that, as a general matter, one MBS is interchangeable with another. Performance should be comparable, and risk factors should be similar.
Yves Smith contends that the TBA market exclusion would not represent a huge loss for San Bernardino County or their borrowers. She estimates an added expense of 10 to 30 basis points (0.1-0.3%) as a result. But it’s an unnecessary expense, an example of bankers using their power to punish any entity that engages in something they disfavor. Even if this is justified – and it may be, given that the TBA market assumes that something like a taking in eminent domain cannot happen – it represents the same kind of thuggery banks engaged in, with regulator support, when they shut down state consumer protection laws against mortgage fraud during the run-up to the housing bubble.
Mortgage Resolution Partners, the private company engineering the deal in San Bernardino, issued a response to SIFMA, which concluded with the statement “It is hard to comprehend the motives of those who would employ discriminatory means to attempt to bully and coerce cities from staving off mass foreclosure and blight, rather than assisting cities in that urgently needed effort.” This is true, but they don’t make much of a case for why SIFMA should continue to allow those mortgages in the TBA markets.
I see this more as a warning to other municipalities. I don’t hold much of a brief for the MRP approach, which focuses on performing loans. And from the way that things are going in San Bernardino, their plan may never get off the ground. But I do think that eminent domain in general could be a solid approach in the absence of other real steps to arrest the foreclosure crisis. And by its actions, SIFMA is saying they will use all elements under their control to block efforts to ameliorate the crisis.