Not well known within the local area is that Boise was one of the hardest hit communities in the nation during the mortgage foreclosure crisis. According to CNN Money, in 2010 Boise surfaced as one of the Top 25 worse-hit areas in the nation, with roughly 1 in 21 homes being foreclosed upon. And as you can see from the image above, even by the fourth quarter of 2012 Ada County still had over 55% of its mortgages underwater. Whether we adjust to the new reality where so many mortgage holders have lost their equity that home-ownership has lost its appeal, or whether some solution is found to resurrect the idea of owning one’s own home as an economically stable investment, appears to most of us as something to be left to the whims of fate.
But, a small town in California appears to have taken a proactive step towards improving the plight of homeowners.
by Lydia DePillis (October 5th, 2013, Washington Post, WonkBlog)
For communities across the land — North Las Vegas, San Bernardino County, Calif., Chicago — where too many are stuck with house payments beyond what they can afford, this was the nuclear option. While those cities backed away, Richmond hit the
button. (DePillis, 2013)
This “nuclear option” was the city’s decision to utilize its power of eminent domain to condemn the mortgages on underwater homes within its city limits. Though this seems like a radical move that would only occurred to city leaders from a town in California, the idea has a surprising academic provenance. As the depth of the recession grew there were some quiet discussions being held in the halls of government regarding the potential use of municipal police powers to address the growing incidents of blight stemming from numerous abandoned properties. In 2011, Chicago mayor Rahm Emanuel pushed for the adoption of a municipal ordinance that held mortgage lenders liable for abandoned property — even if the homeowner’s name was still listed as the property-owner. Over the strenuous objections of those in the real estate and financial industries, Mayor Emanuel felt the city had little recourse given that Chicago had to expend over $15M in 2010 alone to clean-up abandoned properties. But, outside of large cities like Chicago, by 2012 these overt interventions by local governments appeared to have fizzled.
That is until Robert Hockett, on sabbatical from his position as professor of financial law subjects at Cornell Law School and while working as consulting counsel at the International Monetary Fund, published a thought-provoking article about the use of Eminent Domain.
In the view of many analysts, the best way to assist “underwater” homeowners—those who owe more on their mortgages than their houses are worth—is to reduce the principal on their home loans. Yet in the case of privately securitized mortgages, such write-downs are almost impossible to carry out, since loan modifications on the scale necessitated by the housing market crash would require collective action by a multitude of geographically dispersed security holders. The solution, this study suggests, is for state and municipal governments to use their eminent domain powers to buy up and restructure underwater mortgages, thereby sidestepping the need to coordinate action across large numbers of security holders. (Hockett, 2013)
As someone who was involved in the Occupy Wall Street protest (via Occupy Boise), at one level it is surprising to me to see a small city attempt to address the mortgage crisis. The degree that financial institutions had woven together debt inter-dependencies through the mortgage-backed securities scheme — and the degree that bond rating agencies had knowingly, and falsely, rated these new securities as safe investments — created a perfect storm of misplaced confidence, lack of accountability, and massive over-pricing in the housing market. This left a Gordian Knot so complex that it simply appeared beyond local government’s ability to untie.
Not that I believe such solutions won’t more often be found at the personal level — and what’s more personal than a city council for a small town (Richmond, CA has a population of just over 103,000). Nor am I particularly surprised that it was a Green Party mayor (Gayle McLaughlin) who was elected just prior to the crash in 2006, served through the Great Recession and was re-elected in 2010 — who became the champion for a local government-based solution.
What really took me by surprise was the city’s decision stop saber rattling and actually adopt a resolution to utilize Eminent Domain to acquire underwater mortgages, for the purpose of refinancing the properties at their current market value — so the homeowners could continue to live in their homes. To be clear, the city is not condemning the properties themselves and taking fee-simple ownership of the homes — they are only condemning the underwater mortgage notes. They will then facilitate the refinance of those notes, based on the current market value of the property.
When we in Occupy discussed potential solutions to the mortgage crisis, we thought in terms of “physically occupying” homes whose homeowners were under threat of eviction. This would only work as a type of moral suasion to elicit public outrage over heavily-armed sheriff deputies serving the bidding of fat-cat banksters — while they evict defenseless homeowners who were hard-hit by the recession. Though this strategy did work in several instances around the country — by publicly embarrassing banks and forcing them to renegotiate more favorable terms for the homeowners’ mortgages — it did not provide a means to solve the very real widespread nature of the problem and often only resulted in antagonizing the situation. Perhaps more to the point, those of us in Occupy did not believe that any group of “angel investors” would appear and provide a bailout for homeowners, since they would have to assume the underwater notes at their inflated value — a situation deemed even less probable than getting all the myriad owners of the mortgage-backed securities to agree to uniformly refinance the underwater mortgages.
The concept that a government entity could exercise its powers of eminent domain to erase the overage on the mortgage notes simply never occurred to most of us. At least, it didn’t to me.
We thought that the best that could be done to help is what some out of Occupy Wall Street have been doing for non-mortgage bad debt. An OWS offshoot group, Strike Debt, has been doing some amazing things with its Rolling Jubilee effort. The organization has been buying up old medical debt for pennies on the dollar and simply forgiving the debt. The organization has now forgiven over $12M of bad medical debt by expending just over $600K.
Unfortunately, Richmond has had to deal with its fair share of blow-back from the financial industry. As stated in the San Francisco Gate article (Said, 2013), the city had recently attempted to refinance $34M worth of bonds (unrelated to the eminent domain issue), but bond investors refused to buy the notes forcing the city to withdraw from the sale. I suspect the investors believed Richmond’s current course of action is exposing the city to undue risk to financial loss due to eminent domain-related lawsuits and they were unwilling to purchase bonds that might not perform as expected.
Perhaps in one of the more cynical moves, in response to the City of Richmond’s actions Standard & Poor’s issued a statement that it would automatically downgrade the bond ratings for any community that opts to use its power of eminent domain to help homeowners. In case anyone wasn’t watching, Standard & Poor’s was one of the securities rating agencies that had inappropriately assigned high ratings to the mortgage-backed securities that were at the center of the mortgage crisis. In February of this year, the U.S. Justice Department filed fraud charges against the bond rating agency in it role over the financial meltdown. For its part, Idaho along with 14 other western states (including the District of Columbia) filed suit against Standard & Poor’s alleging fraudulent securities rating manipulations. Although the various Attorneys General had requested that their various suits be tried in their respective states, in June of this year a Federal judicial panel ruled that the cases would be tried as a consolidated case in the Southern District of New York.
I for one wish Richmond all my luck. If they can establish a precedent for local government intervention in the all-too-risky mortgage lending industry, it will discourage any bank in the future from engaging in behavior that can risk the public’s welfare. If it can work for a town of 100,000 folks, it could certainly work in Boise.
- Why one town is keeping Wall St. up at night | Washington Post (washingtonpost.com)
- Banks Terrified of Eminent Domain in Richmond California (livinglies.wordpress.com)
- The New Proposal in a Fed Report That Involves Eminent Domain and the Government Seizing Mortgages (theblaze.com)
- Mortgages, Eminent domain and Richmond (calculatedriskblog.com)
- Banks’ eminent domain suit against Richmond tossed (sfgate.com)