Wells Fargo Bank, National Association et al v. City of Richmond, California et al

Filing 64

MOTION for Leave to File Amicus Brief in Support of Defendants' Opposition to Plaintiffs' Motion for Preliminary Injunction filed by Bay Area Legal Aid, California Reinvestment Coalition, Housing and Economic Rights Advocates, Law Foundation of Silicon Valley, National Housing Law Project. (Attachments: # 1 Proposed Memorandum of Amici Curiae National Housing Law Project, Housing and Economic Rights Advocates, Bay Area Legal Aid, California Reinvestment Coalition, and Law Foundation of Silicon Valley, # 2 Ex. 1 - Decl. of Glenn Schlactus, # 3 Proposed Order)(Schlactus, Glenn) (Filed on 9/9/2013)

Exhibit 1 to Mem. of Amici Curiae In Supp.
of Defs.’ Opp. to Pls.’ Mot. for Prelim.
Injunction
Declaration of Glenn Schlactus

John P. Relman*
1 Glenn Schlactus (SBN 208414)
Jamie L. Crook (SBN 245757)
2 RELMAN, DANE & COLFAX PLLC
1225 19th St. NW, Suite 600
3 Washington D.C. 20036
Telephone: [phone]
4 Facsimile: [phone]
[e-mail]
5 [e-mail]
[e-mail]
6 * Subject to admission pro hac vice
7 Marcia Rosen (SBN 67332)
Kent Qian (SBN 264944)
8 NATIONAL HOUSING LAW PROJECT
703 Market Street, Suite 2000
9 San Francisco, CA 94103
Telephone: [phone]
10 Facsimile: [phone]
[e-mail]
11 [e-mail]
12 Attorneys for Amici Curiae National Housing Law Project,
Housing and Economic Rights Advocates, Bay Area Legal
13 Aid, California Reinvestment Coalition, and Law Foundation
of Silicon Valley
14
15

UNITED STATES DISTRICT COURT

16

NORTHERN DISTRICT OF CALIFORNIA

17

SAN FRANCISCO DIVISION

18
WELLS FARGO BANK, NATIONAL
19 ASSOCIATION, as Trustee, et al.,
20
21

Plaintiffs,
v.

22 CITY OF RICHMOND, CALIFORNIA, a
municipality, and MORTGAGE
23 RESOLUTION PARTNERS LLC,
24

Defendants.

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Case No. CV-13-3663-CRB
DECLARATION OF GLENN
SCHLACTUS
Date: September 12, 2013
Time: 10:00 a.m.
Judge: Honorable Charles R. Breyer
Courtroom 6, 17th Floor

25
26
27
28
Wells Fargo Bank, National Association, et al. v. City of Richmond, California and Mortgage Resolution Partners LLC
Decl. of Glenn Schlactus

1

I, Glenn Schlactus, hereby declare as follows:

2

1.

I am Counsel at the law firm Relman, Dane & Colfax, PLLC. I represent Amici

3 Curiae National Housing Law Project, Housing and Economic Rights Advocates, Bay Area
4 Legal Aid, California Reinvestment Coalition, and Law Foundation of Silicon Valley. I submit
5 this declaration in support of these organizations’ proposed Memorandum In Support of
6 Defendants’ Opposition to Plaintiffs’ Motion for Preliminary Injunction.
7

2.

Attached hereto as Exhibit A is a true and correct copy of a document titled

8 “SIFMA Statement on Eminent Domain and TBA Trading,” dated July 19, 2012, available at the
9 web address https://www.sifma.org/news/news.aspx?id=8589939537 (accessed on Sept. 8, 2013).
10

3.

Attached hereto as Exhibit B is a true and correct copy of a document titled “TBA

11 Market Fact Sheet,” dated 2013, available at the web address
12 http://www.sifma.org/issues/item.aspx?id=23775 (accessed on Sept. 8, 2013).
13

4.

Attached hereto as Exhibit C is a true and correct copy of an e-mail sent on July

14 11, 2012, by Richard Dorfman, Managing Director and Head of Securitization of the Securities
15 Industry and Financial Markets Association. The e-mail was obtained from the federal
16 government pursuant to a Freedom of Information Act request. It was produced by the
17 government with the redactions identified on the document.
18

5.

Attached hereto as Exhibit D is a true and correct copy of written testimony

19 submitted on May 22, 2008, to the House Committee on Financial Services by Thomas Hamilton,
20 Vice Chairman, MBS and Securitized Products Division, Executive Committee of the Securities
21 Industry and Financial Markets Association, available at the web address
22 https://www.sifma.org/workarea/downloadasset.aspx?id=1528 (accessed on Sept. 8, 2013).
23

6.

Attached hereto as Exhibit E is a true and correct copy of a report prepared by

24 Amherst Securities Group LP titled “Creative Uses of Eminent Domain—Implications for PLS
25 Trusts,” dated June 28, 2012.
26
27
28
- 1 -

Wells Fargo Bank, National Association, et al. v. City of Richmond, California and Mortgage Resolution Partners LLC
Decl. of Glenn Schlactus

7.

Attached hereto as Exhibit F is a true and correct copy of a letter sent on July 15,

2 2013, by a coalition of advocacy organizations and unions to Congress.
3
4

I hereby declare under penalty of perjury that the foregoing is true and correct to the best

5 of my knowledge and belief.
6
7 EXECUTED WITHIN THE UNITED STATES ON: September 9, 20 l3
8
9

10
11

BY:

Glenn Schlactus

12
l3
14
15
16
17
18
19
20
21
22
23

24
25

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-2 -

Wells Fargo Bank, National Association, et al. v. City of Richmond, California and Mortgage Resolution Partners LLC
Decl. of Glenn Schlactus

EXHIBIT
A

9/8/13

SIFMA Statement on Eminent Domain and TBA Trading | 2012 | Newsroom

Newsroom

SI FM A Statement on Eminent Domain and TBA Trading
Release Date: July 19, 2012
Contact: Katrina Cavalli,212.313.1181, [e-mail]
SI FMA Statem en t o n Em in en t Do m ain an d T BA T radin g
New Y o rk , NY , Ju ly 19, 2012—SIFMA today issued the following statement on eminent domain and TBA trading:
Recent press reports have discussed SIFMA's consideration of the potential impact of a seizure of mortgage loans through an eminent domain process
on the To-Be-Announced (TBA) markets for Mortgage-Backed Securities (MBS). The reports correctly note SIFMA and its members' strong
concerns with and objections to such proposed policies that involve the use of involuntary seizures under eminent domain powers. SIFMA's existing
TBA trading practice guidelines do not currently contemplate such actions and their impact on the homogeneity of loans eligible for TBA delivery
needs to be assessed. Therefore, SIFMA necessarily discussed this issue with its members.
The TBA markets are the most liquid, and most important secondary market for mortgage loans. The hundreds of billions of dollars of daily trading
in these markets, involving investors around the world, has for 30 years provided significant and tangible benefits to mortgage borrowers and
mortgage lenders, and to the U.S. economy. Aside from being a conduit to draw massive amounts of global investment capital to the U.S. mortgage
markets, the TBA markets also allow borrowers to obtain affordable rate locks as they shop for a home, and provide a critical risk management tool
for mortgage lenders and servicers. The TBA markets are the benchmark for all mortgage markets in the country.
The fundamental concept that underlies TBA markets is homogeneity. In the TBA markets, buyers and sellers trade in a forward manner – that is, a
trade executed on a given day may not settle for one, two, or even three months. Importantly, at the time of the trade, the identity of the mortgagebacked securities that will be delivered is not known. Rather, the counterparties agree on certain general characteristics of the pool, such as the
issuer, coupon, term (15 or 30 years), and settlement month of the trade. This means that the collateral that falls into the various categories must be
considered fungible. Investors must have confidence that, as a general matter, one MBS is interchangeable with another. Performance should be
comparable, and risk factors should be similar.
SIFMA believes that protection of the integrity of this market is of utmost importance, and market participants share a similar feeling of
responsibility to ensure the market works as efficiently as possible so as to provide maximum benefits to consumers, lenders, and other market
participants. This is especially important given the general withdrawal of private mortgage funding that has been experienced over the last few years.
During the crisis, if there were no TBA markets, mortgage credit would have been significantly more constrained for borrowers.
The introduction of eminent domain creates a material and unquantifiable new risk factor. To the extent that a municipality exercised such power on
mortgage loans, loans within that jurisdiction would present a new, unique, and unquantifiable risk factor that would destroy the homogeneity of
those loans with loans in areas where such eminent domain powers were not exercised. These loans would exhibit unpredictable prepayment
behavior, and stand apart from other loans. The ability of municipalities to exercise a call option on loans in mortgage-backed securities would
meaningfully decrease the value of those assets. Therefore, SIFMA, based on discussions with its members, does not believe that such loans should be
eligible for inclusion in TBA trading. SIFMA is issuing this statement today to introduce a policy regarding the interaction of eminent domain with
TBA trading. Loans to borrowers residing in areas that municipalities have initiated condemnation proceedings to involuntarily seize mortgage loans
through their powers of eminent domain will not be deliverable into TBA-eligible securities on a going-forward basis. In the event such seizures occur
and this policy is activated, SIFMA would review the facts and circumstances of the situation periodically; should those facts and circumstances

www.sifma.org/news/news.aspx?id=8589939537

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9/8/13

SIFMA Statement on Eminent Domain and TBA Trading | 2012 | Newsroom
change, SIFMA would review its policy in light of those changes.
The exclusion from TBA trading would not exclude such loans from secondary markets, from securitization, or from global funding markets. Such
loans could be securitized and funded by investors at levels that appropriately reflect the risk profile of the mortgage loan collateral, through the
specified pool market and through other, non-government forms of securitization. This exclusion would protect the integrity of the TBA markets that
serves all residents of this country though its promotion of affordable and accessible housing finance.
For more information on the TBA market, please review SIFMA's TBA Fact Sheet.
-30The Securities Industry and Financial Markets Association (SIFMA) brings together the shared interests of hundreds of securities firms, banks and
asset managers. SIFMA's mission is to support a strong financial industry, investor opportunity, capital formation, job creation and economic growth,
while building trust and confidence in the financial markets. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of
the Global Financial Markets Association (GFMA). For more information, visit http://www.sifma.org.

www.sifma.org/news/news.aspx?id=8589939537

2/2

EXHIBIT
B

TBA MARKET FACT SHEET

FACT SHEET | 2013

THE TBA MARKET
What is the TBA market and why is it important?
Established in the 1970s with the creation of pass-through securities at Ginnie Mae, the To-Be-Announced (TBA) market facilitates the
forward trading of mortgage-backed securities (MBS) issued by the GSEs (Fannie Mae and Freddie Mac) and Ginnie Mae. The TBA
market creates parameters under which mortgage pools can be considered fungible and thus do not need to be explicitly known at the
time a trade is initiated. This is where the name for the product “To Be Announced” comes from. The TBA market is based on one
fundamental assumption – homogeneity; at a high level, one MBS pool can be considered to be interchangeable with another pool. The
TBA market is the most liquid, and consequently the most important secondary market for mortgage loans. The TBA market is responsible for significant capital flow from a wide range of investors. As shown below, an average of $246 billion of agency MBS was
traded each day in March 2013 by the primary dealers and this volume is second only to the U.S. Treasury market.

U.S. Bond Markets Average Daily Trading Volume
2013:Q1
600.0
500.0
400.0
300.0
200.0
100.0
0.0
Treasury

Agency MBS

Federal Agency
Securities

Corporate Debt

Municipal

As TBA trade settlements are often scheduled significantly into the future, the TBA market serves a critical market function by allowing
mortgage lenders to hedge and/or fund their origination pipelines. By hedging the risk that market interest rates may change, lenders
can lock in a price for the mortgages they are in the process of originating. The liquidity of the TBA market also creates efficiencies and
cost savings for lenders that are passed on to borrowers in the form of lower rates.
How does a TBA trade function?
The process flow of a TBA trade is found below:

Trade Date
4/23/2013

Terms of
trade are
agreed upon

48-hour
Day
6/11/2013

Buyer is
informed of
specific
identity of
pools to be
delivered

Settlement
Date
6/13/2013

Pools are
delivered and
funds
exchanged

The key dates for a TBA trade are the trade date, the notification date (48-hour day) and the settlement date. On the trade date, 6 criteria are agreed upon for the security or securities that are to be delivered: issuer, maturity, coupon, face value, price, and the settlement
date. For example: Customer A agrees to buy, at an agreed price, from Bank B $100 million of Fannie Mae 30-year securities with a six
percent coupon for delivery in two months. TBA trades normally settle according to a monthly schedule set by SIFMA.1 According to
1

A full calendar of the settlement dates can be found at: http://www.sifma.org/Issues/Capital-Markets/Securitization/Housing-Finance-andSecuritization/Resources/.

1

TBA MARKET FACT SHEET

FACT SHEET | 2013

industry practice, 2 two business days before the contractual settlement date of the trade, the seller will communicate to the buyer the
exact details of the MBS pools that will be delivered (the 48-hour rule). Due to the required two days notice, the notification date is
often called the 48-hour day. On the settlement date, the securities that were specified two days earlier are delivered and the buyer pays
the seller for the securities.
How is the TBA market structured?
Participants in the TBA market generally adhere to market-practice standards commonly referred to as the “Good-Delivery Guidelines.”
These guidelines cover a number of areas surrounding the TBA trading of agency MBS, and are promulgated by and maintained by
SIFMA, through consultation with its members. The purpose of the guidelines is to standardize various trading and settlement related
issues to enhance and maintain the liquidity of the TBA market. Many of the guidelines are operational in nature, dealing with issues
such as the number of bonds that may be delivered per one million dollars of a trade, the allowable variance of the delivery amount
from the notional amount of the trade, and other similar details. However, other guidelines deal with qualitative aspects of the loans
that underlie the securities, as well as the structure of the securities themselves. A concept that underlies the TBA guidelines is that of a
“standard loan.” Standard loans are loans which are eligible collateral for bonds which are traded in the TBA market. While each standard loan may not be exactly the same, they share many general characteristics, and perform in a more consistent manner.
Mortgage pools, which are not eligible for TBA delivery, may be traded in what is called the “Specified Pool” Market. In the specified
pool market, unlike the TBA market, the actual identities of the bonds that are to be bought and sold are known at the time of a trade.
This is similar to how most other bonds, such as corporate bonds, are traded. Many products which do not fit into the TBA guidelines
are traded as specified pools. For instance these pools could be pools backed by interest-only loans, which in 2006-2007 became part of
Agency issuance; pools backed by 40-year mortgages; pools backed by loans with prepayment penalties; and pools of various types of
adjustable rate mortgages. Pools with specific desirable characteristics, such as low average loan balances, which are eligible for TBA
trading may also be traded in specified pool markets if they can be sold at a premium to the prevailing TBA market prices.

2

SIFMA’s “Uniform Practices Manual” can be found at http://www.sifma.org/research/bookstore.aspx.

2

TBA MARKET FACT SHEET

Chris Killian
Managing Director, SSG
Joseph Cox –Senior Associate, SSG
Marianne Brunet – Summer Intern, Capital Markets

CAPITAL MARKETS

The Securities Industry and Financial Markets Association (SIFMA) prepared this material for informational purposes
only. SIFMA obtained this information from multiple sources believed to be reliable as of the date of publication;
SIFMA, however, makes no representations as to the accuracy or completeness of such third party information. SIFMA
has no obligation to update, modify or amend this information or to otherwise notify a reader thereof in the event that
any such information becomes outdated, inaccurate, or incomplete.
The Securities Industry and Financial Markets Association (SIFMA) brings together the shared interests of hundreds of
securities firms, banks and asset managers. SIFMA's mission is to support a strong financial industry, investor opportunity,
capital formation, job creation and economic growth, while building trust and confidence in the financial markets. SIFMA,
with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association
(GFMA). For more information, visit www.sifma.org.

3

EXHIBIT
C

EXHIBIT
E

Amherst Mortgage Insight
June 28, 2012

MBS Strategy Group
Laurie Goodman / [e-mail] / 212.593.6026
Roger Ashworth / [e-mail] / 212.593.6095
Brian Landy, CFA / [e-mail] / 212.593.6094
Lidan Yang, CFA / [e-mail] / 212.593.6093

Creative Uses of Eminent Domain—Implications For
PLS Trusts
Summary
On June 19, 2012, San Bernardino County and 2 cities in that county (Ontario and
Fontana) approved a resolution which paves the way for the municipalities to acquire
underwater residential mortgages using the right of eminent domain. Under one
proposed plan the targeted loans are performing underwater loans in PLS. While the
program as approved would be quite small, we believe this use of eminent domain
sets a potentially troublesome precedent. In this article, we discuss the pro-forma
economics of the program, highlight (once again) why legacy PLS structures provide
investors with little ability to protect themselves, discuss possible courses of investor
action, and the consequences if no actions are taken.
On June 19, 2012, California’s San Bernardino County Board of Supervisors
approved an amended resolution, which established a Joint Exercise of Powers
Agreement between the County of San Bernardino, the City of Ontario, and the City
of Fontana. This agreement allows for the establishment of a joint powers authority
that will “take actions and make decisions to assist in preserving home ownership
and occupancy for homeowners with negative equity within the Parties’ jurisdictions,
avoid the negative impacts of underwater loans and further foreclosures and
enhance the economic vitality and health of their respective communities.” It’s
dubbed the “Homeownership Protection Program,” and is structured to allow
additional cities to join.
This Homeownership Protection Program “may include the Authority’s acquisition of
underwater residential mortgage loans by voluntary purchase or eminent domain.”
After these loans are purchased at fair market value, the intent is to restructure these
loans to allow the homeowner to continue to occupy the property. The “joint parties
authority is permitted to modify, restructure, hypothecate, assign, pledge, securitize,
convey or re-convey these loans and deeds or trust.” The program clearly applies
only to the loans; it expressly excludes the power to acquire the homes by eminent
domain.

A Concern To PLS Investors
This ordinance allows the “taking” of mortgages at fair market value. One plan,
sponsored by Mortgage Resolution Partners (MRP), being considered by the Joint
Powers Authority is currently seeking capital to support this program. The loans
targeted will be performing underwater loans in private label securitizations (PLS).
This material has been prepared by individual sales and/or trading personnel and does not constitute investment research.

Amherst Mortgage Insight

1

June 28, 2012

Map of San Bernardino County, Fontana, and Ontario, CA

San Bernardino
County, CA

Source: Google

We understand the intent is to refinance
these borrowers to just under the home’s
fair market value (97.75 LTV), using the
FHA Short Refinance Program. The
Homeownership Protection Program (HPP)
structure would require that the local
government entity take title to the loans,
and pay the PLS Trusts with money
provided by Mortgage Resolution Partners.
When the loans are refinanced, the
proceeds are used to repay investors who
financed the HPP.

It is interesting that the targeted
borrowers are expected to be those in
private label securitizations, but not
loans in GSE pools. [NOTE: FHA loans are
Fontana, CA
ineligible for the short refinance program.]
We believe this reflects the fact that private
label securitizations (PLS) were poorly
Ontario, CA
designed—the private label structure does
not provide for a responsible party whose
duty it would be to ensure that such a
taking was legal and the “fair market” price
was actually fair. If this program were to
target GSE loans, the case would be
certain to end up in court, challenged both on the legality of the program and the fair
market determination.
We have long been concerned about the lack of flexibility, lack of transparency, and
the passive nature of the servicer/trustee responsibilities in the PLS agreements. We
are sympathetic to the basic premise that it is very difficult to get loans out of the
private label trusts to allow them to be restructured and more actively managed. In
particular, there is no mechanism for restructuring a performing loan within a PLS
trust, and we have no doubt that many performing underwater loans will eventually
proceed through foreclosure without some form of restructuring. Based on a very
careful analysis of the total credit profile of the borrowers, it can be determined
which of these loans are most likely to default, and taking select loans out of a trust
could conceivably result in a higher realized value for PLS investors. Using eminent
domain is a novel (albeit aggressive) idea to reach this goal. However, we suspect
this program is being done without a careful analysis of which borrowers need the
write down, and we also suspect that the parties are incented to purchase the loans
below fair market price. Moreover, it is the lack of a “protector” for the PLS loans,
potentially allowing for a purchase at less than fair value, which makes these loans
an attractive target. The inability to write down performing underwater borrowers
applies to GSE loans as well as PLS loans. (Principal reduction is an often used tool
for non-performing loans in private label securitizations, an activity that we support;
GSEs do not permit the use of principal write-downs under any circumstances.)
In this article, we focus on the Mortgage Resolution Partners version of the HPP
program. We first detail the characteristics of the loans that we believe are targeted
by this version of the program. We then describe our take on the pro-forma

This material has been prepared by individual sales and/or trading personnel and does not constitute investment research.

Amherst Mortgage Insight

2

June 28, 2012

economics of the HPP program, to the HPP investor, to the borrower, and to the
PLS investor. In the third section we detail why private label investors have little
protection. Finally, we cover why this use of eminent domain sets a very dangerous
precedent that will add to the challenges of bringing back private label
securitization.
BOTTOM LINE—While the HPP program is very small, the clear intent is to
grow it. We believe this use of eminent domain sets a troubling precedent by
targeting performing loans in private label securities; do not have a built-in
mechanism that would protect them against a less than fair price. Programs
like this highlight the need for securitization reform and, absent of such reform,
show how it would be more difficult and expensive to bring private capital back
into the market.

I. Targeted Borrowers
The borrowers targeted for this program are performing underwater loans in private
label securitizations. We do understand that municipalities in which homes have lost
close to 50% of their market value since housing’s peak would want to “do
something.” We also understand that borrowers who are deeply underwater have a
reasonable chance of defaulting going forward, adding to foreclosure inventory. A
restructuring of the debt will lower the probability of default. However, if the
targeted loans are performing and underwater loans—then the logic escapes us as
how a municipality can make the case that the target should be only loans in private
label securitizations, but not Fannie or Freddie loans, nor loans in bank portfolios.
While San Bernardino County is the first area to adopt this type of resolution, we do
know that other municipalities have been approached by Mortgage Resolution
Partners. And it is a very tempting proposition for communities that have suffered
significant home price depreciation. Not only is it politically popular, but if the San
Bernardino experience sets a precedent, the municipalities are getting paid for their
participation in this program (as least under the MRP version of the HPP); these
monies can be applied to reduce budget deficits or forestall property tax increases.
We decided to test how many loans could be affected if this resolution becomes
widespread. Thus we grouped owner-occupied loans that were performing for 6
months, and had a mark-to-market LTV (loan-to-value) of ≥110. The results of our
analysis, shown in Exhibit 1 (next page), indicate an aggregate of 4.2 million loans in
private label securitizations. Of these, 1.4 million are at least 60 days past due (nonperforming), 2.7 million are performing (current or 30 days past due), and 2.4 million
of those 2.7 million have been current for the past 6 months. Approximately 0.5
million of the performing loans with a good pay history are non-owner occupied. Of
the 1.9 million owner-occupied units, just over 0.5 million of them are sufficiently
underwater to qualify for this type of program (173,000 have a 110–125 LTV and
359,000 have a >125 LTV). That amounts to 12.7% of private label loans by count (or
15.4% by balances).
Exhibit 2 (next page) shows the 532,000 loans for the potential program that are
owner-occupied, current for the past 6 months, with a mark-to-market LTV ≥110,

This material has been prepared by individual sales and/or trading personnel and does not constitute investment research.

Amherst Mortgage Insight

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June 28, 2012

Exhibit 1: PLS Loans Targeted for Eminent Domain—Loan Count and Balance
Performing 
Status
Non‐Performing

Pay History

Balance 
($Bil)
358
69
85
305
51
56
102
514
599
668
1,026

Occupancy

MTM LTV Loan Count
1,426,016
Current < 6 Months
342,598
Non‐Owner Occupied
451,598
≤100
1,268,897
100‐110
Current ≥6 
Owner 
161,053
Performing
Months
Occupied
110‐125
172,534
>125
359,325
Owner Occ Subtotal
1,961,809
Current ≥ 6 Months Subtotal
2,413,407
Performing Subtotal
2,756,005
Grand Total
4,182,021
Source: CoreLogic, 1010Data, Amherst Securities as of May 2012

Multilien(%)

HPA CS (%)

LTV Orig

LTV MTM

CLTV Orig

CLTV MTM

73 682 40 100

50 42

‐43

81

146

86

159

CA (ex. Fontana and Ontario)

87,339,073,120 214,355

407,451

72 709 54 100

33 52

‐44

78

141

83

155

338,851

71 683 43 100

34 43

‐50

78

154

82

167

3,165

38

6.4

4.9 5.5 3.8 79%

54% 36%

64 

36 

65 

95

CA (ex. Fontana and Ontario)

62

38

5.4

4.3 4.9 3.2 88%

62% 32%

50 

50 

71 

100

Fontana and Ontario, CA

39

61

5.6

3.7 4.9 3.0 86%

56% 40%

57

43

66

101

Curr GWAC RPL (%) 
Model Recovery Rate 
(% of Fair Value) 
Model Recovery Rate 
(% of Curr Loan 
Balance) 

Orig GWAC (%) 

62

Region

Curr GWAC APL (%) 

RPL (%)

US (ex. CA)

Curr APL/RPL GWAC 
Overall (%)

APL (%)

Present Value of Loan 
(% of Fair Value) 

1,072,462,902

Present Value of Loan 
(% of Curr Loan 
Balance) 

Fontana and Ontario, CA

Full Doc (%)

220,964

Count Average Loan Size

% IO

69,457,492,529 314,339

FICO

Balance ($)

US (ex. CA)

WALA

Region

% Default  
Model Loss Severity (% 
of Curr Loan Balance) 
Model Net Recovery (% 
of Curr Loan Balance, 
100‐Loss Severity) 

Owner Occ (%)

Exhibit 2: PLS Loans Targeted for Eminent Domain—Characteristics

Source: CoreLogic, 1010Data, Amherst Securities as of May 2012

broken down by loan characteristics. Our 3 groups are the 2 cities in San Bernardino
County (Ontario and Fontana) that already approved the agreement, the balance of
California, and the rest of the United States. Note that underwater, performing, owneroccupied loans are disproportionately located in California. While California has 21.2%
of the private label universe by loan count and 34.8% by balance, it constitutes 41%
of the loans that could be targeted by an HPP program by count and 56% by balance.
Note also that the 2 cities in San Bernardino County that approved the resolution have
only 3,165 loans meeting the necessary criteria. These 3,165 loans are distributed
This material has been prepared by individual sales and/or trading personnel and does not constitute investment research.

Amherst Mortgage Insight

4

June 28, 2012

across 1,533 deals, with 12 loans being the maximum in a single trust. What concerns
us is the precedent, not so much the impact of this one particular effort.
The characteristics of the targeted loans are no surprise—680–710 FICO, 33–50% full
documentation, 42–50% with second liens (multi lien %), and 40–54% were Interest
Only (IO) loans at origination. The original LTVs were 78–81; current LTV is 154 for the
2 cities in San Bernardino County, with 141 and 146 for the balance of California and
the rest of the nation, respectively. CLTV (combined loan to value) on the targeted
loans are higher—167 for the 2 cities in San Bernardino County, with 155 and 159 for
the balance of California and the rest of the nation, respectively.
Not surprisingly, this deeply underwater cohort contains many loans that have already
been modified. Note that for the 2 affected cities, 39% of the loans are “always
performing” (APL; never 2 payments or more behind), while 61% are “re-performing”
(RPL; they have been two payments or more behind); most have become current via a
modification (usually via an interest rate reduction). The gross WAC (weighted average
coupon) on the APLs is 4.9%; the gross WAC on the RPLs is 3.0%, resulting in a
blended gross WAC of 3.74%. For the balance of California and the rest of the nation,
62% of the loans are “always performing”; 38% are re-performing, with a gross WAC
on the RPL loans of 3.8 and 3.2, respectively.

II. Economics of the Transaction—HPP Investors / Homeowners /
PLS Investors
We believe that the intent (confirmed by investors who have heard the Mortgage
Resolution Partners HPP pitch) is to buy the targeted loans out of the trusts at 75-80%
of AVM (automated valuation model) on the property. It is unclear what type of AVM
will be used—one including only distressed sales, only non-distressed sales, or a
combination. AVMs are usually based on a mix of distressed and non-distressed
homes. In an area that has many distressed sales, the AVM will reflect the mix (even
though homes targeted for this program are neither distressed nor for sale).
The targeted homes will receive an FHA short refinance. This program (outlined in the
HUD Mortgagee Letter 2010-231 and amended by HUD Mortgagee Letter 2012-52)
requires that:
•
•

•
•

The homeowner must be in a negative equity position.
The homeowner must be current on the existing mortgage to be refinanced. (If the
Mortgagor successfully makes 3 consecutive on-time payments during the trial plan,
the Mortgagor is eligible for a permanent loan through the FHA Short Refinance
Program.)
The homeowner must occupy the 1-4 unit property as their primary residence
The homeowner must qualify for a new loan under standard FHA underwriting
requirements and possess a FICO score ≥500. Standard FHA underwriting requires
≤31% housing DTI (DTI = [1st mortgage payment + 2nd mortgage payment + taxes +
mortgage insurance premium + hazard insurance + homeowner’s association dues +
ground rent + any special assessments]) and a ≤43% back-end (total debt) DTI. Under
the energy-efficient home policy, those limits can be stretched to 33% and 45%,

1

   The link is as follows: http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/10‐23ml.pdf 

2

  The link is as follows: http://portal.hud.gov/hudportal/documents/huddoc?id=12‐05ml.pdf 

This material has been prepared by individual sales and/or trading personnel and does not constitute investment research.

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•

•
•
•
•
•

respectively. In some circumstances compensating factors can permit the limits to be
exceeded. Note that FHA Short Refinance Program will need a new appraisal; an
automated valuation model (AVM) or broker price opinion (BPO) is insufficient to
establish value.
For loans that receive a “refer” risk classification from TOTAL Mortgage Scorecard,
the housing DTI should be ≤31% and the back-end DTI ≤50%; the housing DTI can be
≤35% if the back-end DTI is ≤48%.
The existing loan to be refinanced must not be an FHA-insured loan.
The existing first lien holder must write off ≥10% of the unpaid principal balance.
The refinanced FHA-insured first lien must have an LTV of ≤97.75%.
Non-extinguished existing subordinate mortgages must be re-subordinated, and
combined LTV on the new loan must be ≤115%.
All loans made under this program must close on or before December 31, 2014.
Let’s assume the first lien is written down to 97.75 LTV. What happens to the second
liens in these transactions? It is unclear to us how this would be handled. The most
logical alternative is that since the first lien is being taken by eminent domain, they
also take the second lien. However, the banks would most certainly protest whatever
“fair market value” is selected. It is conceivable to us that the second lien would not
be taken by eminent domain, and thus would be left intact in some instances or renegotiated in others (And there may be situations in which the presence of a large
second makes it economically unattractive to take the first lien). The FHA Short Refi
Program allows the second lien to be re-subordinated in its entirety if it is <17.75% of
the current market value (115–97.75%). Thus, many second liens would require no
write down. If the amount of the second lien is greater than that, then Mortgage
Resolution Partners, as program sponsor, can ask the second lien holder to take a
write down, in exchange for a second that is more likely to pay plus some cash.
This is possible because of the flexibility afforded second liens in the FHA Short
Refinance Program. FHA short refinance rules allow that: (1) the first mortgage can be
taken out for <97.75% and the second can comprise the difference (up to 115 LTV); or
(2) a first lien of up to 97.75% LTV can be taken out, with cash from this used to pay
down some of the second lien debt, as long as all of the criteria above are met. Thus,
if the first lien were 110 LTV and the second lien was 25 LTV—the program would
permit a 90 LTV first mortgage and a 25 LTV second mortgage (keeping the second
intact). Alternatively, the FHA short refinance program would permit a new FHA
mortgage to be taken out for 97.75 LTV, with the first lien written down to 90, and the
7.75 difference used to pay down the second lien. So the second lien holder remains
intact, with a 17.25 mortgage and cash of 7.75%.
For first lien investors, the economics of this transaction depend critically on the level
at which the loans are being purchased out of the Trust. For the purposes of the
analysis below, we will assume the intent (confirmed by several investors who heard
the the HPP pitch) is to purchase the loans at 80% of the market value of the property
based on the AVMs. If the loans are purchased at 100% of the market value of the
property, the economics become much less appealing to the HPP investor, and closer
to fair value for the PLS investor.
Now let’s look at the economics of the transaction to the HPP investors. Assume: (1)
the loans are purchased out of the trust at 80% of the market value of the property
based on AVMs, and refinanced into a 97.75% LTV FHA mortgage, and (2) the rate
offered on the new mortgages were 4.0%. These mortgages could be sold into a

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GNMA 3.5 pool at 106 (August settlement). Thus, the sponsor essentially obtains the
mortgages at 80% of the property value and sells the FHA loans at 103.61% of the
property value (97.75 x 1.06). We understand that the Joint Powers Authority must get
paid something for their efforts. Discussions with market participants who were
pitched on the program indicate that the Joint Powers Authority is slated to receive
about 5 points per 100. In addition, not all the loans will qualify for the FHA short
refinance program. This program requires the loans to be current. To the extent the
borrower goes delinquent during the process, he is not eligible for the short refinance
program (hence we assume that the loans that will be targeted will have 6 months of
clean history). To the extent the borrower is unwilling to submit the documentation, or
does not qualify for the short refi program (because of either DTI ratios or FICO
scores), the loans will fall out and will be sold in loan form. However, if the AVM is low
(and we argue it is likely to be below the fair market value of the property or the loans),
then even the loans that “fall out” are unlikely to be sold at a loss. Mortgage
Resolution Partners are receiving a per loan fee for structuring the transaction. There
are also some costs of FHA origination that must be paid for out of the differential
between the acquisition price of 80% of fair property value and the disposition of
103.61% of fair property value. In summary, if the imposition of eminent domain
occurs at a price of 80% of property value, investors in the HPP program will
realize significant returns.
Now we’ll consider the borrower. Assume a current loan for $300,000 on a home
worth $200,000, so the mark-to-market LTV is 150. The borrower is currently paying a
gross WAC of 3.75% (the average rate on these loans), and assuming the loan must
amortize over a remaining maturity of 288 months (weighted average loan age of 72
months) suggests a current monthly payment of $1,584.72/month. Assume the
borrower is refinanced into a new 30-year first mortgage for $195,500 ($200,000 x
0.9775) at a 4.0% interest rate. The mortgage insurance premium is an upfront cost of
1.75% (which can be rolled into the loan amount) + 1.25% per annum. Thus, the new
loan amount (rolling in the upfront premium) is $198,921; the new monthly interest rate
is 5.25% (the 4.0% gross WAC + the 1.25% annual mortgage insurance premium), for
a payment of $1,098.45. Thus—the borrower is certainly better off. He has a lower
monthly payment, and has been re-equified.
Finally, consider a private label investor whose loans were sold out of the trust at 80%
of market value. It is difficult to price these assets from comparables, as there is no
real market for 150 LTV, 170 CLTV first liens that have not been delinquent in the past
6 months. We can estimate the fair value of the performing loans by assuming the
investor is paid back in full on the loans that do not default; loans that default are
liquidated at the severity appropriate to their loan characteristics. In the case of the
loans above, assume the probability of default at 40% (this number is taken from the
bottom section Exhibit 2). Thus, he has a 60% chance of eventually collecting
$300,000 (but we must calculate a discount for the low coupon of 3.75%). Using a 6%
discount rate (and the numbers are very sensitive to this discount rate), for value of the
non-defaulted $300,000 claim is $243,582). The value of the defaulted claim is 43% of
the original loan amount or $129,000. [NOTE: Recoveries are estimated to be 86% of
the fair value of the property, or 56% of current loan balance, as shown in the bottom
right section of Exhibit 2 for Ontario and Fontana. We must subtract the costs of
foreclosure plus the value of taxes, insurance and excess depreciation during the
foreclosure process, while the borrower is in the home but not paying. Thus, we
calculate a severity of 57%, and a recovery of 43% of the current loan amount.] In our
This material has been prepared by individual sales and/or trading personnel and does not constitute investment research.

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example, the investor has a 60% chance of collecting $243,582 and a 40% chance of
collecting $129,000, for an expected value of 197,749, or 98.9% of the fair market
value of $200,000 (which is 66% of the current loan amount). Note that across the
universe of loans, the “fair value” of the loans is very close to 100% of the value of the
property.
Thus, if the private label loans are taken out of the trust at 80% of the value of
the property, the private label investor would fare very poorly. Performing loans
would be taken out of the trust without representation, with insufficient
compensation (80% of current property value versus our estimated value of
100%). The PLS investor is also losing the option that the situation will improve;
default rates will continue to decline, and home prices will at some point rise. If
the PLS investor were compensated at the fair value, it would significantly
reduce any profit for the HPP investors. And, as we show in the next section,
compensation at fair value is unlikely, as the PLS investor is relatively defenseless.

III. Who’s Looking Out For The Trust? (Neither Servicer nor Trustee
Have That Obligation)
We argue that servicers and trustees (and trust administrators, if applicable) of nonagency trusts have no obligation to challenge a fair value estimate arising from the
execution of eminent domain. We spent significant time with the governing
documents, and we see no specific provisions where the servicer or trustee would be
required to act on behalf of the PLS investor to ensure the application of eminent
domain was at a “fair” price. We are not lawyers, but the documents appear to provide
plenty of opportunity for servicers and trustees to take a passive role in this
circumstance. To illustrate this point, we will use the Pooling and Servicing
Agreement3 (PSA) for OOMLT 2007-1, a subprime Option One transaction (selected
because we see the PSA as a relatively generic RMBS agreement and broadly
indicative).

a) Servicer’s Responsibility to (Not) Act
If a loan were purchased out of a trust at fair market value through the eminent domain
strategy, this fair market value would most likely be at some discount to the par value
of the mortgage, which would create a loss on the loan. So, while liquidations are
generally considered to originate from defaulted loans, it can be easily argued that an
eminent domain purchase is a liquidation event as per the PSA. The PSA defines
Liquidation Event and Proceeds as follows:
“Liquidation Event”: With respect to any Mortgage Loan, any of the
following events: (i) such Mortgage Loan is paid in full, (ii) a Final
Recovery Determination is made as to such Mortgage Loan or (iii)
such Mortgage Loan is removed from the Trust Fund by reason of its being
purchased, sold or replaced pursuant to or as contemplated by Section
2.03 or Section 10.01. With respect to any REO Property, either of the
following events: (i) a Final Recovery Determination is made as to such
REO Property or (ii) such REO Property is removed from the Trust Fund
by reason of its being sold or purchased pursuant to Section 3.23 or
Section 10.01.

3

 The link as follows: http://www.sec.gov/Archives/edgar/data/1385902/000088237707000327/d616712_ex4‐1.htm 

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“Liquidation Proceeds”: The amount (other than amounts received in
respect of the rental of any REO Property prior to REO Disposition)
received by the Servicer in connection with (i) the taking of all or a part
of a Mortgaged Property by exercise of the power of eminent domain
or condemnation, (ii) the liquidation of a defaulted Mortgage Loan by
means of a trustee’s sale, foreclosure sale or otherwise or (iii) the
repurchase, substitution or sale of a Mortgage Loan or an REO Property
pursuant to or as contemplated by Section 2.03, Section 3.23 or Section
10.01.
As you can see above, eminent domain is referenced specifically in the definition of
Liquidation Proceeds. In fact, the term is only referenced in one other place in the PSA
(where the originator reps and warrants there were no outstanding eminent domain
claims on properties). (Although clause (i) of the definition of Liquidation Proceeds
refers to a Mortgaged Property instead of the mortgage loan itself, given the lack of
other provisions relating to the taking of a mortgage loan itself, this clause could likely
be interpreted to be relevant.)
What is the servicer obligated to do in the case of a taking of all or part of the property
by eminent domain? As outlined in the section on Final Recovery Determination, the
servicer is obligated to make sure they received the recoverable proceeds on a
property. Here is the definition of Final Recovery Determination:
“Final Recovery Determination”: With respect to any defaulted Mortgage
Loan or any REO Property (other than a Mortgage Loan or REO Property
purchased by the Originator or the Servicer pursuant to or as
contemplated by Section 2.03 or 10.01), a determination made by the
Servicer that all Insurance Proceeds, Liquidation Proceeds and other
payments or recoveries which the Servicer, in its reasonable good
faith judgment, expects to be finally recoverable in respect thereof
have been so recovered. The Servicer shall maintain records, prepared
by a Servicing Officer, of each Final Recovery Determination made
thereby.
So the servicer is really just required to make sure they deposited in the trust the full
amount of proceeds from the eminent domain taking.

b) Trustee’s Responsibility to (Not) Act
Article VIII of the PSA contains trustee relevant provisions. Section 8.01 of the PSA
discusses the “Duties of the Trustee.” The first two sentences of this section highlight
the basic responsibilities of the Trustee (i) prior to an event of default (defined in that
PSA as a Servicer Event of Termination) and after such event of default is cured and (ii)
when an event of default is occurring and continuing (which we will refer to as “in
effect” herein):
While an event of default is not in effect, the Trustee “undertakes to perform such
duties and only such duties as are specifically set forth in [the PSA]”.
If there is an uncured event of default that a responsible officer of the Trustee has
knowledge of (i.e., the event of default is in effect), then the Trustee must “exercise
such of the rights and powers vested in it by [the PSA], and use the same degree of
care and skill in their exercise, as a prudent man would exercise or use under the
circumstances in the conduct of his own affairs.”
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Much of Section 8.01 limits the Trustee’s duties and obligations further. For
instance:
The Trustee, upon receipt of all resolutions, certificates, statements,
opinions, reports, documents, orders or other instruments furnished to
the Trustee which are specifically required to be furnished pursuant to any
provision of this Agreement, shall examine them to determine whether
they conform to the requirements of this Agreement; provided,
however, that the Trustee will not be responsible for the accuracy or
content of any such resolutions, certificates, statements, opinions,
reports, documents or other instruments. If any such instrument is found
not to conform to the requirements of this Agreement in a material manner
the Trustee shall take such action as it deems appropriate to have the
instrument corrected, and if the instrument is not corrected to the
Trustee’s satisfaction, the Trustee will provide notice thereof to the
Certificate holders and the NIMS Insurer.
So if the Trustee is required to look at the documentation provided by the Servicer (if
any) it must only make sure that it looks acceptable on its face. Moreover, since there
are not likely to be any specific obligations of the Trustee relating to eminent domain
takings of mortgage loans, the Trustee is not likely to take any further actions.
Sections 8.01, 8.02 and 8.03 further discuss how the Trustee has no real obligation to
pursue/fight an eminent domain sale. Absent the Trustee’s negligence, Section 8.01(v)
provides that:
prior to the occurrence of a Servicer Event of Termination and after the
curing of all Servicer Events of Termination which may have occurred, the
Trustee shall not be bound to make any investigation into the facts or
matters stated in any resolution, certificate, statement, instrument,
opinion, report, notice, request, consent, order, approval, bond or
other paper or documents, unless requested in writing to do so by
the NIMS Insurer or the Majority Certificate holder;
Section 8.02(a)(vi) further provides that—other than as provided in Section 8.01 (e.g.,
negligence or perhaps the post event of default prudent person standard) – the
Trustee:
shall not be accountable, shall have no liability and makes no
representation as to any acts or omissions hereunder of the Servicer until
such time as the Trustee may be required to act as Servicer pursuant to
Section 7.02 and thereupon only for the acts or omissions of the Trustee
as successor Servicer;
Moreover, Section 8.03 provides:
… The Trustee makes no representations as to the validity or sufficiency of
this Agreement or of the Certificates (other than the signature and
authentication of the Trustee on the Certificates) or of any Mortgage Loan
or related document. The Trustee shall not be accountable for the use
or application by the Servicer, or for the use or application of any
funds paid to the Servicer in respect of the Mortgage Loans or
deposited in or withdrawn from the Collection Account by the
Servicer… The Trustee shall at no time have any responsibility or liability
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for or with respect to the legality, validity and enforceability of any
Mortgage or any Mortgage Loan, or the perfection and priority of any
Mortgage or the maintenance of any such perfection and priority, or for or
with respect to the sufficiency of the Trust or its ability to generate the
payments to be distributed to Certificate holders under this Agreement…
BOTTOM LINE—We believe the Trustee will take the position that it has little or
no obligation to ensure fair value is received in the event of an eminent domain
sale. Since it appears that neither Servicer nor Trustee have the fiduciary obligation to
fight for fair value in eminent domain “takings,” investors have very little
representation. And the fact that each trust will have relatively few loans affected from
each additional municipality that signs on to this program, makes it even more unlikely
the eminent domain calculation of fair value will be contested. Moreover, it is not clear
that the trustee (or other reporting party, as applicable) even has the responsibility to
report which loan liquidations were the result of eminent domain activity, although we
hope that they interpret their reporting obligations to require such disclosure as
aggregating any eminent domain proceeds with liquidation proceeds would fail to give
a complete picture to investors.

Eminent Domain—A Potentially Troublesome Precedent
We are very concerned that this use of eminent domain sets a potentially troublesome
precedent. It gives the government a call on the loans, allowing for a re-strike of the
loans, for what could be political motives. And it is likely to impact the willingness of
investors going forward to purchase loans from this municipal area. This cost is
irreversible.
As mentioned earlier, we are sympathetic to the fact that there is no way to restructure
loans in a PLS, unless they are in imminent danger of default. And, even then, there is
insufficient transparency to the investor on the restructurings (modifications). Thus,
eminent domain could conceivably be used to do what the PSAs do not allow for—
restructuring of performing loans under tightly guarded parameters. While we are
sympathetic to this, we believe the troublesome precedent and impact on future
borrowing outweighs this cost.
Even if we believed that there were a strong case to use eminent domain for this
purpose, we would argue there is a better way to structure this program which
more effectively preserves the rights of investors, but achieves the same result
for performing underwater borrowers—the opportunity to refinance in an FHA
short refinance loan. One possibility—the County of San Bernardino could work with
a community-based housing organization to aid the borrower in filing out the FHA
application, and work with the second lien holder to re-subordinate and possibly take
a writedown. A warehouse line could be established by the Joint Authority in which,
just prior to approval by FHA, it is taken by eminent domain, and funded until it can be
placed in an FHA pool (FHA would have to give the county a heads up). The private
label investors (or GSEs or bank lenders) receive about 103% of market value, not
80%. The Joint Authority does not receive its cut; the investors providing capital to
this scheme do not benefit disproportionately, but the economics to the homeowner
are the same.

This material has been prepared by individual sales and/or trading personnel and does not constitute investment research.

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What Has Experience Taught Us?
It is not unusual to find public policy goals in conflict. On one hand you want to further
a public policy goal (in this case, preventing additional foreclosures), on the other hand
there is a cost to mortgage holders. We can think of two precedents—the experience
with PACE loans (loans to promote energy efficiency) in 2010 and the Georgia High
Cost Lending Law in 2002. In both situations, the GSEs stood up to assert their rights.
The difference in this situation is that the investors are less likely to do so.
In fact, this situation is very reminiscent of the PACE (Property Assessed Clean
Energy) experience4. In areas with PACE legislation, the municipal government loans
money to consumers and businesses for an energy retrofit; this is funded through a
bond issue. These loans are repaid over 15–20 years, through a special assessment
added to property tax bills. As initially conceived, the debt would be senior to existing
mortgage debt, so if a homeowner defaults or goes into foreclosure, the PACE
obligation would be repaid before the mortgage lender gets his money. While property
tax assessments are usually senior to existing property debt, allowing property taxes
to be used by homeowners that elect to make upgrades to their own homes create a
dangerous precedent. Fannie Mae announced in August 2010 that they would not
purchase mortgage loans secured by properties with an outstanding PACE obligation
unless the terms of the PACE program do not permit priority over first mortgage liens.
And for borrowers with loans securitized by Fannie Mae, who obtained a PACE loan
prior to the July 2010 cut-off and want to refinance, the lender must first attempt to
arrange a cash-out or limited cash-out refinance option, with the PACE loan paid off
as part of the refinance. If the borrower is unable to qualify for this, the PACE loan
payment must be included in the monthly housing expense calculation.
Fannie’s press release addressed the dangerous precedent head on. Their language is
as follows:
Fannie Mae supports the need for programs to help homeowners fund
energy efficiency improvements, and believes it may be accomplished
without altering the lien status of first mortgages. In the event that PACE or
similar programs with automatic lien priority proliferate, Fannie Mae will
consider further limitations as necessary to address safety and soundness
concerns passed by PACE programs, in line with the July 6, FHFA
statement. These restrictions may include tightening borrower debt-toincome ratios or loan-to-value ratios in jurisdictions offering such
programs.
We wish the author of that press release was available to help write this article!! But
real world—where are we now with PACE loans? A minority of the 16 states that
allowed localities to establish PACE programs have required that the PACE loans be
subordinate to the first mortgage. However, the bulk of the PACE activity was
effectively stopped by FHFA and OCC guidance. (On June 15, 2012, FHFA took more
formal action, by issuing a Notice of Proposed Rulemaking (NPR), as required by a
preliminary injunction issued by the Northern District Court of California.)
Georgia enacted a very tough Fair Lending Act in April 2002, effective October 2002. A
loan of $20,000 or more is classified as High Cost if the total [point + fees] exceeds
5% of the loan amount (higher limits apply to smaller loans). This law provided a very

4

 For further information on the PACE experience, see FHFA Statement on Certain Retrofit Loan Programs, July 6, 2010, and Fannie Mae 
announcement SEL‐2010‐12 “Options for Borrowers with a PACE Loan.” 
This material has been prepared by individual sales and/or trading personnel and does not constitute investment research.

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stringent set of limitations for these loans, with strict penalties for non-compliance.
While the rule was intended to protect borrowers, it left lenders very exposed, and
making “high-cost loans” in Georgia was a poor business decision. The result—both
Fannie and Freddie left the “high-cost loan” market in Georgia (Freddie Mac in
November 2002; Fannie Mae in January 2003).
The likely result of this eminent domain activity for borrowers is that it will make
future mortgage borrowing more costly, as investors will demand ever higher
premiums to buy a new private label securitization. And as for the GSEs and
bank portfolios—they are not included in this round, but could be included in the
next. Thus, they too might build in a risk premium in these areas.

What Actions Can be Taken at this Point?
There has been widespread market concern that the price paid under the HPP will be
low (although we don’t know the price), and investors have little real protection. Thus,
there has been a good deal of discussion among investors as to what actions can be
taken. Much of the discussion has centered on trying, through non-legal channels, to
stop municipalities from using eminent domain in this context. Let’s enumerate the
specific actions that investors have contemplated, with our spin on the implementation
difficulty and likely success of each:
•

Investors can bring a lawsuit questioning the legality of this use of eminent
domain, but several large market participants would end up funding the
lawsuit, as there is no mechanism for cost sharing.

•

Investors can seek to apply business pressure to stop the HPP program—they
will not work with any of the servicers, originators, investment banks involved
in the program. If this were followed up on, it would be successful in many
cases; however, some of these entities are not reliant on business from PLS
investors.

•

Investors and dealers, through SIFMA (Securities Industry and Financial
Markets Association, the trade organizations for the securities industry), can
conceivably determine that loans from affected areas would not be good
delivery for TBA agency pools going forward5. This would require Fannie and
Freddie to build screens in their systems to filter out certain zip codes. The
loss of TBA eligibility would raise the cost of all future borrowings from
affected areas. A less effective possibility would be to make FHA short refi
loans ineligible for GNMA TBA delivery. However, this possibility cannot
change the economics enough to thwart the program.

•

The final possibility is that the GSEs step in on the side of PLS investors. It is
important to realize that Fannie and Freddie together hold $112.9 billion of
PLS, more than 10% of all PLS outstanding, and these portfolio holdings are
clearly affected. If FHFA and the GSEs announced that the GSEs will be
unwilling to insure loans in municipalities which are using eminent domain in
this manner, it would stop the program immediately.

5

 It would be infeasible to exclude loans that have already been pooled. 
This material has been prepared by individual sales and/or trading personnel and does not constitute investment research.

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Investors Need Representation with Fiduciary Responsibilities
We just showed that the private label securitization structure is inherently flawed; no
one has a fiduciary responsibility to look out for investors. The results of this oversight
are apparent on all fronts. Who is charged with looking at the fair value determinations
that arise from the use of eminent domain and making sure they are fair to the
investor? Who enforces the representations and warrantees in the PSAs on behalf of
the investors? Who looks at the expenses relating to liquidations from an investors’
perspective (long timelines, liquidation proceeds that bear no relationship to the value
of the loan and the property, and, what many regard as excessive fees)?
In future securitizations, there is an acute need for an investor representative—
with a fiduciary responsibility to represent investor interests. Investors need
representation and a voice; a fiduciary achieves that goal.

This material has been prepared by individual sales and/or trading personnel and does not constitute investment research.

Amherst Mortgage Insight

14

June 28, 2012

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Disclaimer
The material contained herein is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of
securities. Any investment decision as to any purchase or sale of securities referred to herein must be made solely on the basis of existing public
information on such security and/or any registered prospectus, and that no reliance may be placed on the completeness or accuracy of the information
and/or comments contained in this document. The decision of whether to adopt any strategy or to engage in any transaction and the decision of
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performance of any securities or structures. Change in prepayment rates and/or payments may significantly affect yield, price, total return and average
®
life. Amherst Securities Group LP may have a position in securities discussed in this material.
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Copyright ©2012 Amherst Securities Group, LP. All Rights Reserved. This document has been prepared for the use of Amherst clients and may not
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Any unauthorized use or disclosure is prohibited, and receipt and review of this document constitutes your agreement to abide by the restrictions
specified in this paragraph.

This material has been prepared by individual sales and/or trading personnel and does not constitute investment research.

Amherst Mortgage Insight

15

June 28, 2012

EXHIBIT
F

July
 15,
 2013

Dear
 Members
 of
 Congress,

We
 write
 out
 of
 deep
 concern
 over
 the
 financial
 industry’s
 effort
 to
 promote
 legislation
 or

administrative
 action
 that
 would
 undercut
 the
 ability
 of
 communities
 to
 find
 local
 solutions
 to
 the

continuing
 housing
 crisis.
 We
 urge
 you
 to
 watch
 for
 and
 reject
 measures
 that
 would
 mandate

discrimination
 by
 federal
 agencies
 against
 mortgage
 loans
 made
 in
 communities
 that
 implement
 local

principal
 reduction
 programs.

Predatory
 and
 irresponsible
 lending
 practices
 by
 the
 nation’s
 largest
 banks
 were
 at
 the
 root
 of
 the

financial
 crisis
 that
 drove
 the
 country
 into
 the
 great
 recession
 and
 continues
 to
 hurt
 millions
 of
 families.

The
 crisis
 has
 affected
 everybody
 and
 disproportionally
 hurt
 communities
 of
 color:
 underwater
 rates
 are

approximately
 50
 percent
 higher
 among
 African
 American
 and
 Latino
 homeowners
 and
 in

neighborhoods
 of
 color
 foreclosure
 rates
 are
 almost
 three
 times
 those
 in
 predominantly
 white
 areas.

A
 number
 of
 municipalities
 are
 now
 exploring
 ways
 to
 restore
 community
 wealth
 and
 inject
 money
 back

into
 local
 economies
 by
 purchasing
 mortgages,
 through
 traditional
 eminent
 domain
 authority
 if

necessary,
 and
 resetting
 the
 mortgages
 to
 fair
 market
 value
 so
 that
 homeowners
 can
 avoid
 foreclosure

and
 begin
 rebuilding
 equity.

 These
 cities
 –
 including
 El
 Monte,
 La
 Puente
 and
 Richmond,
 California
 –

have
 large
 African
 American
 and/or
 Latino
 populations
 that
 were
 hit
 incredibly
 hard
 by
 the
 mortgage

crisis.

In
 response
 to
 these
 local
 proposals,
 the
 Securities
 Industry
 and
 Financial
 Markets
 Association
 (SIFMA)

has
 formally
 announced
 its
 intention
 redline
 any
 communities
 that
 make
 use
 of
 this
 authority.i
 After

decades
 of
 redlining
 and
 years
 of
 predatory
 and
 discriminatory
 lending
 (i.e.,
 reverse
 redlining),
 the
 Wall

Street
 banks
 that
 are
 members
 of
 SIFMA
 are
 proposing
 steps
 that
 could
 once
 again
 deny
 credit
 to
 –
 or

make
 credit
 more
 expensive
 for
 -­‐
 communities
 of
 color.

Three
 of
 SIFMA’s
 allies
 in
 Congress
 have
 recently
 asked
 the
 Federal
 Housing
 Authority
 to
 alter
 its
 rules
 so

as
 to
 deny
 qualified
 homeowners
 access
 to
 FHA
 loans
 if
 the
 homeowners’
 cities
 have
 purchased
 their

previous
 mortgage
 through
 eminent
 domain.ii
 SIFMA
 has
 also
 asked
 the
 Federal
 Housing
 Finance
 Agency

to
 alter
 the
 regulations
 governing
 Fannie
 Mae
 and
 Freddie
 Mac
 so
 that
 those
 entities
 will
 not
 purchase

new
 mortgages
 on
 such
 homes.iii
 In
 late
 June,
 SIFMA
 attempted
 to
 insert
 language
 into
 the

appropriations
 bill
 for
 the
 Department
 of
 Housing
 and
 Urban
 Development
 that
 would
 mandate
 these

discriminatory
 changes
 to
 FHA
 policies.

We
 urge
 you
 to
 reject
 any
 proposals
 mandating
 that
 HUD
 or
 the
 FHFA
 discriminate
 against

homeowners
 in
 cities
 that
 make
 use
 of
 their
 eminent
 domain
 authority
 to
 achieve
 principal
 reduction.

Introducing
 new
 policies
 to
 redline
 qualified
 buyers
 would
 undercut
 fair
 lending
 and
 housing
 laws
 and

policies
 and
 have
 a
 disparate
 impact
 on
 communities
 of
 color.
 Such
 action
 Congress
 or
 federal
 agencies

would
 be
 a
 slap
 in
 the
 face
 to
 the
 cities
 and
 towns
 that
 were
 hardest
 hit
 by
 the
 housing
 crisis
 and
 are

now
 working
 with
 local
 citizens
 and
 tax
 payers
 to
 find
 democratic,
 local
 solutions
 to
 the
 problem.

Sincerely,

Action
 Now

Action
 NC

AFL-­‐CIO

AFSCME

Alliance
 for
 a
 Just
 Society

Alliance
 of
 Californians
 for
 Community
 Empowerment

American
 Federation
 of
 Teachers

Americans
 for
 Financial
 Reform

Arkansas
 Community
 Organizations

California
 Reinvestment
 Coalition

Center
 for
 Popular
 Democracy

City
 Life/Vida
 Urbana

Civil
 Justice

Common
 Good
 Ohio

Communication
 Workers
 of
 America

Courage
 Campaign

Delaware
 Alliance
 for
 Community
 Advancement

Home
 Defenders
 League

Idaho
 Community
 Action
 Network

ISAIAH

Jewish
 Community
 Action

Leadership
 Center
 for
 the
 Common
 Good

Living
 United
 for
 Change
 in
 Arizona

Los
 Angeles
 Alliance
 for
 A
 New
 Economy

Maryland
 Communities
 United

Minnesota
 Neighborhoods
 Organizing
 for
 Change

Minnesotans
 for
 a
 Fair
 Economy

Missourians
 Organizing
 for
 Reform
 and
 Empowerment

National
 Association
 of
 Consumer
 Advocates

National
 Consumer
 Law
 Center

National
 Fair
 Housing
 Alliance

National
 People’s
 Action

New
 Bottom
 Line

New
 Jersey
 Communities
 United

New
 York
 Communities
 for
 Change

PICO
 National
 Network

Public
 Justice
 Center

Rebuild
 the
 Dream

Right
 to
 the
 City
 Alliance

SEIU
 32BJ

SEIU
 775NW

SEIU
 925

SEIU1021

SEIU
 Healthcare
 Minnesota

SEIU
 International

SEIU
 Local
 26

SEIU
 Local
 284

SEIU
 Local
 503

SEIU
 Local
 1199

Southsiders
 Organized
 for
 Unity
 and
 Liberation

UAW
 4123

Washington
 Community
 Action
 Network

Working
 Families
 Party

Cc:
 Secretary
 of
 Housing
 and
 Urban
 Development
 Sean
 Donovan

 Federal
 Housing
 Finance
 Agency
 Acting
 Director
 Edward
 DeMarco

i

 See
 7/19/12
 SIFMA
 Press
 Release,
 at
 www.tinyurl.com/SIFMAdocuments,
 stating
 that
 “SIFMA
 is
 issuing
 this
 statement
 today

to
 introduce
 a
 policy
 regarding
 the
 interaction
 of
 eminent
 domain
 with
 TBA
 trading.

 Loans
 to
 borrowers
 residing
 in
 areas
 that

municipalities
 have
 initiated
 condemnation
 proceedings
 to
 involuntarily
 seize
 mortgage
 loans
 through
 their
 powers
 of

eminent
 domain
 will
 not
 be
 deliverable
 into
 TBA-­‐eligible
 securities
 on
 a
 going-­‐forward
 basis.”
 Prohibiting
 the
 securitization
 of

loans
 from
 these
 cities
 will
 raise
 interest
 rates
 and
 monthly
 payments
 on
 mortgages.

ii

 See
 6/11/13
 Letter
 from
 Representatives
 Ed
 Royce,
 Gary
 Miller,
 and
 John
 Campbell
 to
 Secretary
 of
 the
 Department
 of

Housing
 and
 Urban
 Development
 Shaun
 Donovan,
 at
 www.tinyurl.com/SIFMAdocuments.

iii

 See
 7/12/12
 Email
 from
 SIFMA
 Managing
 Director
 Richard
 Dorfman
 to
 Acting
 Director
 of
 the
 Federal
 Housing
 Finance

Agency
 Edward
 DeMarco,
 at
 www.tinyurl.com/SIFMAdocuments.