Is it just me or have some people lost their way pursuing misguided and convoluted ideas to help fix the mortgage market? I almost dropped my coffee cup when I read an article recently describing a controversial but admittedly novel solution to assist homeowners who are making their mortgage payments on houses with huge negative equity.
A private company, Mortgage Resolution Partners LLC, has proposed inducing local governments in the "test" state of California to exercise their power of eminent domain to seize, not houses or property, but the underlying liens! I checked the date and it is not April 1 so we can presume this nascent idea is no joke.
Actually this concept reminds me of the neutron bomb allegedly being developed years ago. The bomb would explode killing all the people but leave all the houses and buildings intact for habitation. How comforting! In this case the houses and homeowners are preserved and the mortgages and investors are destroyed. Certainly assisting or rescuing homeowners appears a noble and worthwhile cause but not a cause everyone supports or thinks best. Since the financial meltdown the mortgage industry has been beset with ignominious attempts and ideas to repair the damage done to homeowners, the economy and real estate values. The government has spent massive amounts of taxpayer and borrowed money on programs like HARP and HARP 2.0 without much success.
This latest brainchild of Mortgage Resolution Partners, which is backed by some venture capitalists, is to use eminent domain to seize private-label securitized mortgage assets from investors (no government insured or owned loans will be targeted) and create a new refinanced FHA mortgage with a market rate and new reduced principal balance. The targeted mortgages must have borrowers who have been making their payments on time and qualify for an FHA loan. MRP plans to refinance the seized mortgages and then sell these newly created FHA mortgages which are more affordable and provide some equity for the homeowners. In the process the investors are paid off at a discounted rate and the fees that are generated reward MRP, their local government partners, and of course the homeowners. Seemingly a lose, win, win, win. But of course the mortgage investors don't win especially given only loans that are current will be targeted. The rational according to MRP is the investors have already marked to market the mortgages when they purchased the pools and therefore will not be harmed. But is that true? What about those investors who purchased the original securities to hold for investment and have not marked to market? Or what about investors who don't plan to sell and are showing a paper loss but will now have to accept a real cash loss? Insanity, chaos. How can this proposal really help spur private investment? As an aside, I am one of the growing number of small retail investors who are nervous about making any investments at all right now. If this is the type of audacious proposal receiving venture capital backing I'm even more apprehensive. There must not be any more simple investments available.
Naturally there will be many legal challenges directed at MRP and the governments exercising eminent domain in such a creative way. What's next, seizing bank accounts to make up for tax revenue shortfalls? Or maybe targeting underwater car loans that have been securitized?
Already dozens of trade groups and other organizations have publicly condemned the idea on grounds the already fragile finance system will be irreparably harmed as well as on the basis of misuse of eminent domain. MRP claims the legal challenges are anticipated and MRP and their government partners will prevail. They also claim this action will stimulate mortgage investment and resolve a big problem for many communities far sooner than otherwise would be the case. Say what? I'm not buying that argument.
With so many homeowners already in foreclosure or facing default, and the nonagency securitization system broken, is this the right idea at the right time? In my opinion, eminent insanity. Or another way of looking at this proposal, imminent disaster.