A good way to kill mortgage lending in a jurisdiction

The Hill:

Heavy hitters in the financial industry are lining up against a new idea brewing among local government officials to help struggling homeowners by seizing control of their mortgages through eminent domain.

With many areas of the country still digging out from the housing crisis, some local governments are considering taking on the underwater mortgages at a substantially lower price, thus making them more affordable for the borrower.

With policymakers at the federal, state and local level struggling to find a way to relieve the burden of unaffordable home loans, the eminent domain idea is being met with open ears.


The receptive response to the idea has put the financial sector on high alert. Firms are warning that a governmental action to seize private property to reduce its value could throw the entire housing market off kilter.



“This is just completely against what is the national interest in terms of mortgage finance,” said Chris Killian, a managing director for the Securities Industry and Financial Markets Association (SIFMA). “It’s just completely wrong in our view.”

Joseph Pigg, vice president and senior counsel in mortgage finance for the American Bankers Association, said the idea could have “devastating” consequences.

“If they were to exercise eminent domain, you’re going to just completely destroy the securitization market,” he said.

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If the plan gains legs, Killian said, mortgage lenders are going to be that much more careful about extending mortgages, lest their value be reduced by the government if homeowners get into trouble. 

“Lenders are going to react and underwrite defensively to protect themselves,” he said.
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I think it will also harm the credit of the communities who try the scheme.  It will make it harder for them to sell bonds because of the potential of a shrinking tax base which would impact their revenues.   It is just a bad idea for everyone but the underwater homeowner and the politicians who are pandering to them.

Government action to keep the market from reaching its bottom is prolonging the recession and a genuine recovery from the housing debacle caused by the Democrat housing policy of making loans to people who could not afford them.