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After testing out different scenarios, ""Moody's Investor Services"":http://www.moodys.com/ concluded a widespread adoption of San Bernardino County's proposed use of eminent domain will increase losses for RMBS pools by around 30 percent.
[IMAGE]The proposal calls for the seizure of underwater mortgages to address the problem of negative equity. Moody's argues seizing underwater performing loans ""would increase RMBS pool losses if other jurisdictions were to adopt it because it would force losses on performing loans that could otherwise have avoided default.""
Through the proposed program, the underwater mortgages would be taken at fair market value and then refinanced into a new mortgage with a lower payment to reflect the current value of the property.
Moody's explained compensation for the seized mortgages would be about equal to the estimated property value minus foreclosure expenses and unpaid servicer advances.
""The estimated property values would reflect the results of other distressed sales and likely be 15 percent to 20 percent lower than open market prices,"" the report stated.
Proponents of the program argue this would provide an incentive for the homeowner to stay current and prevent future defaults and foreclosures.
However, since the proposal includes performing loans, Moody's argues that the proposal would actually force losses on loans.
""The program would force the write-down of underwater but performing loans by seizing them from trusts, leading the trusts to realize losses on loans that in many cases would have otherwise continued to perform,"" Moody's stated.
Moody's reviewed 50 prime jumbo RMBS transactions issued since 2005 and took to four scenarios to determine RMBS losses.
The four scenarios were no jurisdictions adopt the program; California adopts the program and targets all performing loans with an LTV greater than 100; all states in the US adopt the program and target all performing loans with an LTV greater than 100; and all states in the US adopt the program and target all performing loans with an LTV greater than 120.
Also, two assumptions were made for the analysis: all first lien performing loans for single-family, owner-occupied properties with an LTV greater than 100 (or 120) would be seized and compensation for the seized loans would be about 80 percent of the loans’ property values.
For the first scenario where no jurisdictions adopt, losses are about 11.3 percent and the default rate is about 13.8 percent.
For the second scenario, which only includes California, losses are about 11.9 percent and the default rate is about 19.5 percent.
In the third scenario, losses are about 14.8 percent and the default rate is about 30.9 percent.
For the fourth scenario, losses are about 12.9 percent and the default rate is about 20.4 percent.
Thus, RMBS pool losses could increase by as much as 30 percent to 14.8 percent of outstanding balances from Moody's current estimate of 11.3 percent.
Not only does the analysis lead Moody's to conclude losses on RMBS pools could increase by around 30 percent if all 50 states were to adopt the program, but the rating agency also stated there would be an average three-notch downgrade to ratings on investment grade RMBS.
According to Moody's, loans the program would likely target are first lien performing loans with LTVs higher than 120 and backed by single-family owner-occupied properties in San Bernardino county. This type of loan makes up only 0.2 percent of all performing RMBS loans.
But, if the program were applied on a broader scale, the impact would be much greater. For the whole state of California, the targeted loan type would account for about 6 percent of all performing RMBS, and for the U.S., it would be about 13.5 percent.
Thus, Moody's determined limiting the program would result in few, if any, additional losses to RMBS and few changes in ratings, but widespread adoption of the program would lead to RMBS losses and rating downgrades.
