The use of eminent domain to seize debt to help borrowers could lead ratings firm Standard & Poor’s to demand greater protections for investors. Eminent domain, of the type being proposed in Richmond, Calif., creates an “additional risk of default” that needs to be accounted for in the form of more credit support, or protection, such as some classes of deals taking losses before others, according to an S&P report by analysts James Taylor and Sharif Mahdavian.
“The comparative decline in value for mortgages in jurisdictions that have employed eminent domain would likely make securitizations more speculative,” the New York-based analysts said in the report viewed by Bloomberg News. “We would expect this to translate into a higher mortgage rate and/or fewer credit opportunities for borrowers in those jurisdictions.”
Due to its intent to use eminent domain in the above manner, Richmond has been in hot water with mortgage-bond trustees representing investors including BlackRock and Pacific Investment Management Company. The two parties sued Richmond on Aug. 7, according to Bloomberg News, alleging that the city’s proposal was unconstitutional and would cause losses of more than $200 million for bondholders. [Bloomberg News] – Hiten Samtani