Eminent Domain Issue Should not be Taken Lightly; Investor and Training Updates

em·i·nent do·main: Noun - "The right of a government or its agent to expropriate private property for public use, with payment of compensation."

It is a dangerous combination: a law firm trying to get some publicity, a city that declared bankruptcy, and public opinion that a) is against mortgage banking, and b) doesn't really understand what this could mean. Recently California made headlines, and the mortgage industry & investors shutter, when eminent domain was discussed as a way to seize mortgages out of pools by San Bernardino.

Typically, eminent domain has been used to clear property for infrastructure projects like highways, schools and sewage plants. But supporters say that giving help to struggling borrowers is also a legitimate use of eminent domain, because it's in the public interest.

Under the proposal, a city or county would sign on as a client of Mortgage Resolution Partners, and then condemn certain mortgages. The mortgages are typically owned by private investors like hedge funds and pension funds. Under eminent domain, the city or county would be required to pay those investors "fair value" for the seized mortgages. So Mortgage Resolution Partners would find private investors to fund that.

Of course, the question is, "What is fair value?" The value to you, or to me? Most folks see this going nowhere - it is so drastic even the politicians may see the huge negative impact of condemning mortgages. But officials from San Bernardino County and cities of Fontana and Ontario have created a joint powers authority to consider what role local governments could take to stem the fact that homeowners saddled by large mortgage payments might stop making payments, if they haven't already, be foreclosed upon, and lose their homes.

The idea was broached by a group of West Coast financiers who suggest using the power of eminent domain, which lets the government seize private property for public use. In this case, they would condemn troubled mortgages so they could seize them from the investors who own them. Then the mortgages would be rewritten so the borrowers would have significantly lower monthly payments. The chairman of the San Francisco based group, in an interesting public relations move, said that his main concern is to help the economy, which is being held back by the mortgage crisis. "This is not a bunch of Wall Street guys sitting around saying, 'How do we make money?'" he said. "This was a bunch of Wall Street guys sitting around saying, 'How do you solve this problem?'"

"Not so fast" say investors that paid good money for these loans in these pools. And without investors, where would loans and pools of loans go? Mortgage investors are fighting this plan to use government powers to seize the home loans of "underwater" borrowers. If rolled out across the US, the proposal to use powers of compulsory purchase ("eminent domain") could force banks and mortgage investors to realize significant losses on their portfolio of mortgage bonds. And do the markets really need that?

The use of eminent domain forcibly to purchase loans on homes where borrowers owe more than their property is worth can take things to a whole new level. The borrowers would then be given a new mortgage, with reduced debt. City officials say that this could help restore the financial health of the region, which has been blighted by the sharp drop in house prices over the past six years.

But mortgage investors are up upset with this plan proposed to the county by Mortgage Resolution Partners, a group advised by Westwood Capital and Evercore Partners. Investors believe it could set a precedent to be used across the US and, as eminent domain requires paying compensation only at the current - depressed - prices, force them to take losses.

The American Securitization Forum, a collection of the biggest mortgage investors, is sending a letter on Friday to San Bernardino County officials to express "strong objections" to a "short-sighted and ultimately counterproductive" proposal. "We feel like the sanctity of our contracts are being violated," said Paul Jablansky, an investor at Western Asset Management, a large buyer of mortgage bonds. The foundation of securitizations is the pledge that the assets (in this case home loans) are legally isolated in a trust that issues the bonds. "If the eminent domain process occurs successfully, it would set a precedent for the credibility of all securitizations. How can investors get confident that the assets they believe are underlying a security will be there?"

This will, no doubt, be dragged into court, with the costs eventually being borne by future borrowers. In the meantime, investors are spooked. And when investors are nervous, whether about agency or non-agency loans, they tend to lower prices, which in turn raise rates. And do we really need that for mortgages?

On to something simple like somewhat recent investor/M&A/training/agency updates, providing a flavor for the environment. They just don't stop. As always, it is best to read the actual bulletin

On Friday, in Missouri, Glasgow Savings Bank was closed by the Missouri Division of Finance, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. Regional Missouri Bank over in Marceline stepped in to take it over.

Fifth Third has updated its mortgage overlays, the email address to which secure documents should be sent (correspondentsecure.bancorp@53 .com), and the requirements for HASP Open Access loans, which now require a full appraisal in cases where there is no acceptable HVE value. 

Mountain West Financial has mandated that verbal verification of employment be completed during the LQI process and obtained within 10 business days prior to the note date; previously, the Verbal VOE was required within 10 calendar days.  After 10 business days have passed, the verification will be considered expired, and another one will have to be obtained before the documents may be signed.  MWF reminds clients that it no longer obtains pre-funding verification of employment.

In keeping with Fannie and Freddie's announcement that they would no longer be purchasing or securitizing properties encumbered by private transfer fee covenants created on or after February 8, 2011, Kinecta Federal Credit Union no longer permits the origination or purchase of such loans.

All Kinecta properties affected by the fires in Colorado or Tropical Storm Debby in Florida are required to be completely re-appraised, regardless of DU findings.

Towards the end of May, Franklin American had announced that a property inspection report (Form 2075) was no longer required as part of the minimum appraisal documentation for DU Refi Plus loans.  This guideline has been rescinded, and such appraisal requirements are now as determined by DU.

Affiliated Mortgage updated its pricing adjustors for government loans locked or relocked on or after June 26th such that VA loans with FICO scores between 620 and 639 are now subject to an adjustment of -1.50 instead of the previous -0.75.  VA and FHA loans with FICO scores between 640 and 679 are now subject to an adjustment of -0.250, which replaces the previous -0.500 adjustor.

Pinnacle Capital has updated guidelines in several areas.  Regarding conforming loans, realtors are no longer an eligible to certify carbon monoxide detectors, which are required to be on over floor of the property.  Guidance on private transfer fees and dwellings located on multiple tax parcels has been updated, as has guidance stating that non-arm's length transactions on short sales where the buyer and seller are related is not permitted.  The HUD homes website information as it pertains to Good Neighbor Next Door and the borrower contribution requirements for Homepath have been revised, and further guidance on FHA, USDA, VA, and both Standard and Enhanced DU Refi Plus loans has been added.

Radian Guaranty will be updating its MI rates and guidelines on July 23rd to offer borrower and lender-paid single premium MI rates for loans with LTVs between 95.01-97%.  New guidelines will affect delegated only non-agency jumbo loans, for which the maximum allowable loan amount will increase to $850,000 at 95% LTV with a DTI of 41%.  Delegated only non-agency jumbo loans over $650,000 will require six months of reserves, and loans with a 15-year balloon term will be eligible for all non-agency jumbo amounts.  Radian's MI Online ordering and servicing system has been updated as well.

Vermont-based M&T Bank clients should be aware that disaster relief from FEMA is available for borrowers whose properties were damaged by the storms, flooding, and tornadoes in Addison, Lamoille, and Orleans counties at the end of May.  All properties whose appraisals were completed before May 29, 2012 should be re-inspected by the original appraiser as per FHLMC Form 442/Fannie Form 1004D.  The re-inspection should detail any evidence of conditions that would affect the property's marketability in cases where there is damage; for properties that were not affected, an exterior photo must be provided to verify that the property has not been damaged.  Re-inspections should be submitted for review by an M&T underwriter to certify that there is no damage prior to closing.

Provident Funding has removed the Project Questionnaire requirement for detached PUDs from its Program Guidelines.  Requirements for HOA contact information remain the same, and the Project Questionnaire is still necessary for attached PUDs.

SunWest Mortgage has revised its pricing adjustment for FHA Streamline Refinance on Prime and Express products from 0.375 to 0.500.  This took effect on July 2nd.

Farmer City State Bank and Heartland Bank and Trust Company, both of which are owned by descendants of founder MB Drake, have agreed to a merger, with Keefe, Bruyette & Woods acting as advisor.

Every Tuesday, HUD offers Hope LoanPort training to new users from 10am to 2.30pm and 3.30pm to 6pm Eastern Time.  Advanced classes are available on the third Thursday of every month and cover topics such as user administration, reporting, and procedural concerns.  Email kbailey@hopeloanportal .org with an email address, full organization name, city and state, and preferred class date and time to register.

A number of classes from M&T Bank will be available throughout July.  FHA and VA basics, HARP, premium conforming loans, condos and co-ops, and appraisals are just a few of the topics on offer.  Contact the mortgage division of M&T for full details, dates, and registration information.

The New Jersey Association of Mortgage Brokers will be hosting a conference call at 11.30am Eastern Time on July 26th that will discuss all things FHA.  Led by MBANJ/NJAMB FHA Committee Chairman Ralph Vitello, CEO of Maverick Funding Corp, the call will mark the first of several FHA meetings that will take place throughout the year.  To join the call, phone 877-252-8604 and use pass code 3496505092.

The MBA has developed a Financial Fitness app for iPhones and Androids that allows users to determine how financially sound their borrowers are.  The program aims to increase financial literacy by determining what course of action borrowers should take in order to become better acquainted with their personal finances and "financially fit."

It is too early to know what the market is up to, or down to. Not including the usual European ups and downs in the market, there is a lot of news here in the U.S. Today we have Retail Sales and Empire Manufacturing. Tomorrow is the Consumer Price Index, Industrial Production, and Capacity Utilization. And then the housing numbers commence: NAHB Housing Market Index (17th), MBA application index (18th), Housing Starts and Building Permits (18th), and Existing Home Sales (19th). Throw in some Initial Jobless Claims, a Philly Fed, and Leading Economic Indicators, and we're set!

A guy stuck his head into a barbershop and asked, "How long before I can get a haircut?"
The barber looked around the shop full of customers and said, "About 2 hours."
The guy left.
A few days later, the same guy stuck his head in the door and asked, "How long before I can get a haircut?"
The barber looked around at the shop and said, "About 3 hours."
The guy left.
A few days later, the same guy stuck his head in the shop and asked, "How long before I can get a haircut?"
The barber looked around the shop and said, "About an hour and a half."
The guy left.
The barber turned to his friend and said, "Hey, Bob, do me a favor. Follow him and see where he goes. He keeps asking how long he has to wait for a haircut, but he never comes back."
A little while later Bob returned to the shop, laughing hysterically.
The barber asked, "So, where does he go when he leaves?"
Bob looked up and says, "Your house!"