Will the future cost of credit in our community go up, as the opposition is saying?
SIFMA and other Wall Street groups are threatening that future mortgage lending in communities that adopt this program will be more expensive. They claim that having loans taken from investors using eminent domain creates uncertainty in the market and therefore SIFMA’s member are threatening to not buy loans from these communities. There are several reasons why we believe this is a threat intended to frighten localities out of taking action, rather than a realistic prediction of what would happen:
(1) Industry observers point out that there is enough competition in the mortgage market that where there is money to be made there will be lenders ready to make loans, and investors willing to finance them. Trade associations may make threats, but they do not actually control the profit seeking behavior of their members, which are the institutions that actually make and trade loans.
(2) As proposed, this program will only be used with loans owned by Private LabelSecurities (PLS) – pooled loans owned by groups of private investors. This program is not being proposed for any loans owned by Fannie Mae, Freddie Mac, the FHA or the VA. These (quasi) government agencies are buying or insuring 90% of new loans being made (different from the many lenders originating loans).We trust that our government will not redline our community and refuse to buy or insure future loans.
(3) This program is being proposed in response to the current crisis. This use of eminent domain only makes sense, and meets the legal bar of a “public purpose,” because of the large numbers of homeowners who are deeply underwater. Also, if cities so choose, in an abundance of caution they can impose a sunset on the program, to reassure the financial industry that they do not intend to implement such a program as a normal or even periodic course of business.