Standard & Poor’s probably will demand greater protections for investors when mortgage bonds are backed by loans to homeowners in jurisdictions that use eminent domain to seize debt to help borrowers, Bloomberg News reported yesterday. The use of eminent domain, such as is being contemplated by Richmond, Calif., would create an “additional risk of default,” as well as require different assumptions on the size of per-loan losses, S&P analysts James Taylor and Sharif Mahdavian said yesterday. The ratings firm would likely require more credit support, or protection such as some classes of deals taking losses before others, they wrote. Richmond is furthest along in considering using its eminent domain powers in such a way, which is being advocated by Mortgage Resolution Partners LLC and studied by about a dozen municipalities, according to data compiled by Bloomberg. S&P’s statement on its potential reaction if the effort progresses follows the ratings company’s response in 2003 to a predatory-lending law in Georgia with a refusal to grade bonds with home loans in the state.
