NEW YORK, July 25 (IFR) - A controversial proposal to invoke eminent domain in some California municipalities to seize and restructure underwater mortgages may be completely unnecessary, analysts at RBS said on Wednesday, arguing that the actual data shows that the rates of default in the region are mending on their own.
"Even with homeowners still deeply underwater, the data clearly shows that the existing system has dramatically slowed the rate of which these homeowners default," wrote a team of MBS researchers at RBS led by Scott Gimpel.
"Something is working, and the best approach for government officials might be to simply let the system continue to mend itself."
The data-driven analysis bolsters Wall Street's contention that the proposed eminent-domain plan is both unconstitutional and will only further harm the nascent recovery in housing.
San Francisco-based venture capital firm Mortgage Resolution Partners (MRP) has drawn the ire of Wall Street recently with its controversial plan to use the government's power of eminent domain to seize mortgages in San Bernardino County and other California municipalities from underwater borrowers and refinance them through a government program.
The proposal targets borrowers who are still current on their payments.
Investors in residential mortgage-backed securities (RMBS) have been up in arms because the plan would diminish cashflows from loans that are actually still performing.
MRP says that the plan will "stabilize local housing markets and economies by keeping as many homeowners with underwater mortgages in their homes as possible."
However, eminent domain has never been used in this way before. Traditionally, the government invokes eminent domain for public-use projects, such as seizing property in order to build a road.
While Gimpel concedes that underwater loans default at a substantially higher rate than loans with equity, he says that the actual data for San Bernardino shows that the rate of future default has substantially improved and continues to get better each month.
According to RBS, at the peak of the crisis, over 12,000 San Bernardino homeowners in private-label mortgage securitizations defaulted over a 12-month period (April 2008 - April 2009). The latest observed data shows that number dropping 79% to approximately 2,500 homeowners.
Moreover, in November 2007, half of all underwater borrowers in San Bernardino County defaulted within the following 12 months. By June 2011, even with 75% of homeowners still deeply underwater, that same rate significantly declined to 13%, and continues to improve each month.
Gimpel says that servicers of private-label residential mortgage-backed securities are increasingly using alternatives to foreclosure in order to liquidate the defaulted pipeline.
In San Bernardino today, only 56% of liquidations resulted from REO sales, down from 88% four years ago, he said. Moreover, the data shows that short sales are being offered more than ever to San Bernardino homeowners.
"By observing actual historical data, current trends, and the potential number of homeowners now expected to default, local government officials need to decide whether invoking a controversial approach such as eminent domain is actually necessary," Gimpel wrote.
"We leave it to the reader to determine what the actual data suggests." (Reporting by Adam Tempkin; Editing by Ciara Linnane)