Release Date: July 19, 2012
Contact: Katrina Cavalli,212.313.1181,
SIFMA Statement on Eminent Domain and TBA
New York, NY, July 19, 2012—SIFMA today issued the following statement on eminent domain and TBA
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 mortgage-backed
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 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
For more information on the TBA market, please review SIFMA's TBA Fact Sheet.
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.