This year, California’s San Bernardino County and two of its largest cities, Ontario and Fontana, created an entity charged with restructuring mortgages for certain borrowers who owe more than their homes are worth. It is an unusual application of eminent domain, which allows a government to forcibly acquire property that is then reused in a way considered good for the public.
Working with a San Francisco-based outfit of venture capitalists called Mortgage Resolution Partners, the local governments, aiming to keep underwater homeowners in their properties, would seize and restructure the mortgages by cutting their loan balances and then refinancing them in government-backed loans.
Sifma, the main trade association for bond investors, is charged with determining which mortgages can be packaged into securities sold to investors in what is known as the “to-be-announced” mortgage-bond market. The TBA market allows investors to buy and sell securities without knowing their attributes because the loans are homogenous, having met certain standards set by Sifma. That has created an extremely liquid market, one that offers the lowest rates to U.S. borrowers.
Industry officials say that allowing loans to be potentially seized through eminent domain would make them too different from other mortgages in the TBA pools. “We have an obligation to address that, because they would no longer conform with the other mortgages,” said Kenneth E. Bentsen Jr., a Sifma executive who heads public policy for the group. “This creates a material event and we have to make the necessary arrangements.”