By Matthew Goldstein
A controversial idea of using the power of eminent domain to seize underwater mortgages may hurt some of the nation’s biggest banks more than investors in mortgage-backed securities.
The reason is the process of condemning a mortgage in which a borrower owes more money than their homes are worth will likely result in a seizure of any home equity loan–or second lien–on that property as well. And that could spell trouble for many U.S. banks, which at the end of the first quarter had $700 billion in second liens on their books, according to SNL Financial.
The trouble is that analysts say many banks have not adequately reserved against losses on those second liens or taken write-downs to reflect the impairment in value on the underlying mortgages. So an outright seizure of those second liens by a local governments could result in unexpected losses for the banks.
Who says? Some of the biggest proponents of the eminent domain plan being promoted by Mortgage Resolution Partners, a San Francisco firm with backing from a group of West Coast financiers.
Robert Hockett, a Cornell University law professor, who is advising MRP, says, ” what we are planning to do, is the second liens would be extinguished once the first loans are taken.” But Hockett, who has been researching the use of eminent domain to fix the nation’s housing woes for some time, said MRP is sensitive to the potential pain this can cause the nation’s banks and is willing to work with them.