Moody's analyzes impact of widespread use of eminent domain
After testing out
different scenarios, Moody’s Investor Services concluded a widespread adoption
of San Bernardino County’s proposed use of eminent domain will increase losses
for Residential Mortgage-Backed Security (RMBS) pools by around 30 percent.
The proposal calls for
the seizure of underwater mortgages to address the problem of negative equity.
Moody’s argues seizing underwater performing loans “would increase RMBS pool
losses if other jurisdictions were to adopt it because it would force losses on
performing loans that could otherwise have avoided default.”
Through the proposed
program, the underwater mortgages would be taken at fair market value and then
refinanced into a new mortgage with a lower payment to reflect the current
value of the property.
compensation for the seized mortgages would be about equal to the estimated
property value minus foreclosure expenses and unpaid servicer advances.
“The estimated property
values would reflect the results of other distressed sales and likely be 15
percent to 20 percent lower than open market prices,” the report stated.
Proponents of the
program argue this would provide an incentive for the homeowner to stay current
and prevent future defaults and foreclosures.
However, since the
proposal includes performing loans, Moody’s argues that the proposal would
actually force losses on loans.
“The program would force
the write-down of underwater but performing loans by seizing them from trusts,
leading the trusts to realize losses on loans that in many cases would have
otherwise continued to perform,” Moody’s stated.