What happens in Vegas, stays in Vegas, unless you're talking about their underwater home loans. These are agreements that individuals agreed to pay, they posted collateral, and now the collateral is worth less than the loan they wish to reduce the loan amount... wait, shouldn't they have to post new collateral? The current administration doesn't think so, Bill Gross is unsure at best, and North Las Vegas City Council has signed an advisory agreement with Mortgage Resolution Partners, a hedge fund dressed in sheep's clothing, that includes exploring a plan where the City/County would effectively condemn the mortgages of its citizens, forcing the banks to write them off, and then re-issuing new mortgages to the citizens so they can stay in their homes. Of course these losses will be spread to taxpayers, pensioners, and other investors in the mortgage market all across the country and internationally. Originators will likely never lend in that city again, or at best will certainly alter the language of their docs to prevent such action if it is even legal in the first place.
This type of short-sighted plan is a good reason to fire your local politicians. They're wasting your tax dollars on a plan that does not even pass the smell test, and its going to cost you millions in legal fees before it blows up in their faces.
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What happens when you make a bad loan? Your borrower defaults, and you take a haircut if the loan became over 100% LTV. Same is true if the lender is a trust. It doesn't seem unreasonable that eminent domain be used to work out loans which are stuck in foreclosure. I umderstand that that is the case of a lot of loans in Las Vegas.
Yeah, but not only is the borrower not defaulting here (they get to keep the house and the write-down gift), but the government is forcing the private loan holder to write it down. Even worse, a local government is forcing the write down on the broader country's taxpayers (who are generally the mortgage holders).
Not only would the borrower in a normal loan typically not get to continue owning the property after a write-down, but the bank shouldn't be forced to take the haircut by a local county government (or even the Federal government) either.
Most of the crappier loans to Las Vegas strippers were put into trusts, so neither the bank nor the local taxpayers take the hit. The lenders/bondholders would take the hit, and that's as it should be, for putting funny money in front of bad borrowers. If the bad borrower owns the property after some principal forgiveness, at least the municipality doesn't have to mow the lawn and board the windows; it remains more valuable with actual tenants. Banks have done a terrible job owning real estate (loss severities of 75%), so it makes some sense to not foreclose, even if it's not fair.
But taxpayers own the Trusts... You are correct, they are targeting non-agency RMBS loans, so my "bank" statement was a typo.
Further, I agree that foreclosure doesn't make a lot of sense for anyone involved many times. Some sort of mod works best, but it shouldn't be a local county making that decision.
Although I don't believe what these guys say (because they've changed their story over time), they claim that they are only targeting mortgages that are current on their payments but underwater on their mortgage. These are NOT people who are at risk of losing their homes, these are people who are breaking a contract they signed. Worse, they're passing the losses onto investors, which are not secretive offshore hedge funds, for the most part they are pensions, the FDIC, and other taxpayer supported entities.
here is ASF's proposal, which conveniently doesn't mention the FHA or GSE bailouts:
In light of recent proposals in municipalities around the country to implement programs in conjunction with Mortgage Resolution Partners (“MRP”) to use eminent domain to seize mortgage loans in private-label mortgage-backed securities, we recommend that Congress move legislation similar to the “Mortgage Protection Act” proposed by Rep. John Campbell (R-CA) in
the 112th Congress, that would prohibit Fannie Mae and Freddie Mac (“GSEs”) from
purchasing, the Federal Housing
Administration (“FHA”) from insuring, and the Department of Veterans Affairs (”VA”) from making, insuring, or guaranteeing mortgage loans backed by properties located in a jurisdiction that has
used eminent domain to seize mortgages. Alternatively, Congress could prohibit the GSEs from
purchasing or the FHA and VA from insuring any loan that has been seized through the process of
eminent domain or direct FHA, VA and the Federal Housing Finance Agency (“FHFA”) to account for the
higher risk in the purchase price or insurance rate that will result in jurisdictions that attempt
to use eminent domain to seize residential mortgage loans. Any legislation should explicitly
prohibit FHA and VA from insuring, purchasing or allowing refinances of any loans that have seized through the process of eminent domain.
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