Foreclosure and the Eminent Domain Solution Explained
What are the pros and cons of seizing underwater mortgages using eminent domain?
BY: Penelope Lemov | August 15, 2013
Penelope Lemov is a GOVERNING correspondent. She was GOVERNING's health columnist and was senior editor for several award-winning features.
A year ago, I interviewed Robert Hockett, a law professor at Cornell University, who's one of the brains behind a radical approach to solving the foreclosure crisis. Hockett advocates using eminent domain to seize underwater mortgages that lie embedded in securitized mortgage bonds and restructuring them on behalf of homeowners so that payments are affordable. At the time of the interview, several municipalities in California's San Bernardino County were exploring the idea, while Wall Street -- specifically the Securities Industry and Financial Markets Association (SIFMA), which represents bond dealers -- was vehemently opposed to it.
Fast forward to today, and several things have changed: Cities in San Bernardino County ultimately passed on Hockett's plan, but Richmond, Calif., is moving forward with it. A dozen other localities are giving it serious consideration, including El Monte, Calif.; North Las Vegas; and Irvington, N.J.
The strategy, however, is still controversial. In the past few weeks, banks representing major bond investors sued Richmond; Fannie Mae and Freddie Mac, which are among the biggest buyers of private home loan bonds, signed on to the suit. The Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, threatened to pull Fannie and Freddie out of cities employing eminent domain relief on mortgages. And U.S. Congressman John Campbell of California introduced legislation to quash the efforts of cities like Richmond.
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With the rhetoric rising, it's time to review the basics of the concept and spell out the pros and cons.
How does it work?
When mortgage loans are held or owned by individual banks, the banks can write down bad loans. But with securitized mortgage loans, that can't happen in the same way. To get around that hurdle, localities can start by asking the owners of the loans to sell them at prices based on financial models or comparable trades sanctioned by courts.
If the owners refuse to sell, under Hockett's strategy the locality could then move to seize the mortgages and pay fair market value for them. The purchase money would come from a pool of investors, and the city would refinance the loans and write down the principle. The new debt would be insured by the Federal Housing Administration. Homeowners would no longer owe more on their houses than the houses are worth. Repayments on the loans would be paid to the investors who bought them.
What's the argument for the approach?
Advocates for the plan -- including the mayor of Richmond -- say the goal is to help communities by fending off foreclosures that cause blight and create other costs. It's especially attractive to less affluent cities that have been hit hard by the housing crisis. Richmond, for instance, is a largely blue collar city (population 106,000), where almost half of the homes are underwater. In a recent interview, Richmond Mayor Gayle McLaughlin said the city had 900 foreclosures last year and there are "just as many in the pipeline this year. It has devastated our neighborhoods."
What's the basis in law for using eminent domain to seize mortgages?
Hockett, Mortgage Resolution Partners, a San Francisco-based private investment firm that is a key player in raising investment money for the plan, and McLaughlin say governments use eminent domain to take property when it's necessary to act on behalf of the entire community. Most people think of eminent domain as applying to land and buildings, but it's not unusual for it to be used to take intangible property. Eminent domain, though, has to be for a valid public purpose and fair market value must be paid.
What are the objections?
The financial industry sees the seizing of mortgages under eminent domain as a violation of the Contract Clause in the Constitution and an impermissible "taking" of private property under state constitutions as well. On its website, SIFMA states that the plan "would be immensely destructive to U.S. mortgage markets by undermining existing securitization transactions, which would significantly reduce access to credit for mortgage borrowers in affected areas."
SIFMA CEO and former U.S. Sen. Judd Gregg has said that the seizure plan would "harm the savings of everyday Americans around the country and have a negative impact on already stressed pension funds and the value of their investments." That is, the program would hurt owners of mortgage bonds by paying them too little for loans.
Tim Cameron, managing director of SIFMA's Asset Management Group appeared on Fox News where, among other points, he argued that a housing recovery is underway and fewer homeowners are underwater. Therefore, he said, the strategy is not only illegal, but unnecessary. Cameron also charged that the seizure strategy is a "plan by certain investment companies to earn a profit." According to Zillow, a real estate information service, 25.4 percent of U.S. homes with a mortgage were underwater in the first quarter of 2013, an improvement from 31.4 percent in the first quarter of 2012.
What are proponents saying?
They agree that the housing market is improving. Still, they say, cities considering using eminent domain are worse off than the country as a whole. In addition, investors will not be made worse off by the sale of any loan. Hockett says that a lot of these securities are "zombie assets with book values that are out of sync with real values." Eminent domain doesn't cause the loss in value of the bonds: it just recognizes it, he says.
What will happen?
In Richmond, city officials have sent notice to the holders of more than 620 underwater home mortgages in the city, asking them to sell the loans to the city for 80 percent of the fair value of the homes. The loan owners have been given a mid-August deadline to accept the deal. Should the owners of the loans refuse, the city says it is prepared to seize the loans using eminent domain.
There's been no action on Rep. Campbell's bill. The courts have yet to rule on the lawsuits. The FHA, which the plan counts on to insure the restructured loans, announced it was not sure the new mortgages would qualify for FHA insurance. And other cities interested in a similar seizure strategy are taking a "wait and see' attitude, making Richmond the test case.
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HUD Stays Clear of Eminent Domain Debate
August 16th, 2013
Investor Update: On August 14, National Mortgage News published an article titled HUD Stays Clear of Eminent Domain Debate.
HUD Stays Clear of Eminent Domain Debate
The Department of Housing and Urban Development is refusing to take a position on eminent domain until a city or municipality actually condemns and seizes a mortgage and seeks to refinance the loan through a special FHA refinancing program.
In a letter to three Republican California congressmen, HUD acting assistant secretary Elliot Mincberg said HUD recognizes the “serious concerns” raised by the issue of eminent domain.
Richmond, Calif., is presently facing several private lawsuits to stop it from condemning and refinancing over 60 underwater private-label loans.
The three congressmen (Reps. Ed Royce, Gary Miller and John Campbell) are pressing HUD to block any refinancings through the FHA.
In the letter, the assistant secretary points out that HUD does not know whether any new mortgage created through eminent domain would qualify for FHA mortgage insurance.
“Moreover, until such plans produce concrete, analyzable results, HUD will not know what, if any, effects it will have on FHA and the mortgage market,” Mincberg says in the Aug. 12 letter.
Mortgage Resolution Partners is working with the city of Richmond and plans to refinance seized mortgages via the FHA short refinance program. That short refi program would require the San Francisco-based mortgage banking firm to reduce the loan amount by at least 10% to get the LTV down to 96.5%.
“HUD is continuing to monitor closely events on this issue,” Mincberg says. “If necessary, HUD will issue informational guidance to FHA-approved lending institutions as appropriate.”
To view the online article, please click here.
Safeguard Properties is the largest mortgage field services company in the U.S. Founded in 1990 by Robert Klein and based in Valley View, Ohio, the company inspects and maintains defaulted and foreclosed properties for mortgage servicers, lenders, and other financial institutions. Safeguard employs approximately 1,700 people, in addition to a network of thousands of contractors nationally. Website: www.safeguardproperties.com.
Take my house, please!
A new strategy emerges to keep foreclosure victims in their homes: Buy their mortgages -- and write them new loans
By David Dayen
(Credit: Flickr/David Cohen)
Major cities and some wealthy suburbs may have seen a recovery in the housing market, but between the coasts and in smaller towns nationwide, the flood of underwater homeowners continues.
Take Richmond, Calif., for example, where a staggering 46 percent of homes remain “underwater,” meaning borrowers owe more on the mortgage than the house is worth. These communities have needed a solution for years to prevent successive foreclosure waves and save their neighborhoods from a spiral of blight. And maybe they’ve hit on something.
The answer? Eminent domain.
“The banks aren’t helping us, so we’re stepping into the void and making it happen ourselves,” said Richmond mayor Gayle McLaughlin.
McLaughlin became the first U.S. mayor to take steps to use eminent domain authority — seizing mortgages from the lien holder and selling them back to the homeowner at an affordable rate, giving them the principal reduction that will allow them to stay in their home over the long term.
Other cities have flirted with the controversial strategy, which uses capital funding from a for-profit private investment firm called Mortgage Resolution Partners, but Richmond has actually made purchase offers on 624 loans. The servicers had until yesterday, August 13, to agree to the heavily discounted price, which MRP and Richmond determined through a third-party appraiser. No one has agreed to the terms, and so Mayor McLaughlin will go back to the City Council to get approval to begin the eminent domain process. Other cities are watching, seeing if this can be a national model.
But the mortgage industry has decided to make an example of Richmond, prolonging the fight and preventing relief for borrowers. Investor groups representing the nation’s largest holders of mortgage-backed securities, including government-sponsored entities Fannie Mae and Freddie Mac, filed a federal lawsuit last week against Richmond, arguing that the eminent domain scheme is unconstitutional.
Eminent domain seizures of private property must have a public purpose and must offer just compensation to the property owners. The investors allege in their suit that preventing foreclosures is not a valid public purpose, and they say that the compensation they’re being offered is not just. The latter point can be argued, as the offers are very low. For example, on a mortgage worth $300,000 where the real property is only worth $150,000, Richmond offered $120,000 in compensation. Then, they plan to help refinance the borrower (probably using a Federal Housing Administration loan) into a new 30-year loan with a small slice of equity, for around $145,000.
Complicating this is the fact that, of the 624 loans Richmond has offered to purchase, 444 of them are performing mortgages, where the borrower is current on their payments. Being underwater does put these families at risk of future delinquency, especially if they run into hard times. And many of these loans have interest rate resets or balloon payments down the road that will make it hard to stay current. So there’s reason to price in the potential for default somewhat. But investors assert, with some merit, that if the borrowers have been paying for years, the fair value of the mortgage is simply the full value of the mortgage.
“You look to the borrower payment stream as the primary source of value,” argues Yves Smith of Naked Capitalism, a critic of the Mortgage Resolution Partners approach. “These are borrowers who are clearly committed to keeping their homes and have income to do so.”
With 223 of the loans in the scheme current, Mortgage Resolution Partners and Richmond will have a tough time claiming the investors will get just compensation, particularly under California’s property-owner-friendly eminent domain laws. In fact, the investors allege they will lose $200 million on the handful of loans in Richmond. And MRP must get the loans at that heavily discounted rate for their scheme to work, and to reap a profit.
Ultimately a judge will decide this, but not after perhaps years of litigation, defeating the purpose of providing an urgently needed solution for borrowers whose struggles could re-appear at any moment. The mortgage industry has united to fight this and will spend whatever necessary. Moreover, conservative lawyers are licking their chops at using this case to roll back what they see as an unconstitutional expansion of eminent domain, particularly the Kelo v. New London ruling of 2005. The Federalist Society held a call last Friday, focusing on the compensation issue, where NYU Professor Richard Epstein responded favorably to suggestions that this case could roll back Kelo. The worst-case scenario is that this well-intentioned plan becomes counter-productive, and harms municipal efforts to improve cities through eminent domain.
If firms like MRP really seek to benefit communities through local principal reduction schemes, instead of using the eminent domain power they can simply buy the mortgages outright. One financial intermediary has been able to make this work on a small scale. Boston Community Capital, a non-profit, launched what they call the Stabilizing Urban Neighborhoods (SUN) Initiative in 2009.
The SUN Initiative targets borrowers in default or foreclosure rather than current underwater loans, working with the lender to buy out the mortgage and then refinancing the borrower with an affordable payment.
“We said to lenders, look, you’ve got a mortgage at a bubble price, we’ll pay you the market price and keep the homeowner in the home,” Elyse Cherry, CEO and president of Boston Community Capital, told Salon. “Rather than destabilizing neighborhoods, work with us.”
Through the SUN initiative, the firm has been able to purchase 270 mortgages in the Boston area, raising the capital through individuals and foundations, as well as borrowing. On average, the homeowner winds up with a principal reduction of around 40 percent, financing at a 6.375% interest rate. While this is higher than the average mortgage rate, the homeowners they work with, either in default or foreclosure, would have no opportunity to get credit otherwise. The new, affordable mortgage allows the homeowner to clean up their credit score and rebuild equity, ultimately enabling them to refinance into a lower interest rate and save even more money.
Careful underwriting has ensured that the situation works for everyone involved. The lender gets paid off with the market price, more than they would in a foreclosure sale. The borrower gets a loan they can afford. And the community gets much-needed stability.
In the four years of the program, just one of the 270 mortgages has landed back into foreclosure, and the re-default rate is a low 2 percent. For context, redefault rates for the oldest loan modifications in the government’s HAMP program, most of which were not principal reductions, are at a stunning 46 percent. Unlike HAMP, the SUN Initiative bears more resemblance to the Depression-era Home Owner’s Loan Corporation, putting individual homeowners at the center of the relief, rather than trying to nudge mortgage lenders to do the right thing at their discretion. And the proof is in its achievement.
The success of the program has enabled Boston Community Capital to use the secondary mortgage market to raise $35 million to purchase more loans. Boston Community Capital plans to expand into Maryland, where a second foreclosure wave has been rising over the past year. They plan to make the first purchase offers within 30 days.
“The goal is to use the expansion experience as a template, to move into other markets where the bubble price and the market price are different,” Cherry told Salon.
Given the evidence, it appears facilitating principal reductions at the local level by simply buying out the loans has a better chance of success than using a controversial eminent-domain scheme that could backfire. But in both cases, we’re still only talking about hundreds of loans, when there are millions of underwater mortgages across the country. The real solution here, the one with the appropriate scale, is for the federal government to pursue this type of program itself. But Fannie Mae and Freddie Mac, which could get some of the way there, have rejected principal reduction, despite their own numbers showing it would create a financial benefit.
Until then, we have to rely on people like Elyse Cherry to create the win-win that people in power should have been doing all along. Cherry’s ready to step aside whenever Washington comes to their senses.
“If government decides to pursue this,” she said, “I would be happy to be put out of business.”
David Dayen is a contributing writer for Salon. Follow him on Twitter at @ddayen.
Wednesday, 14 August 2013 13:32
US Government Threatens California City Trying to Save Homeowners From Foreclosure
MARK KARLIN, EDITOR OF BUZZFLASH AT TRUTHOUT
In a move that is hard to fathom considering how many banks too big to fail are being fined for subprime mortgage fraud, the nation's top house financing regulator, the Federal Housing Finance Agency, is threatening that if the City of Richmond, California, uses eminent domain to save homes for families, mortgages will be cut off for the city.
According to the Los Angeles Times:
The salvo from the Federal Housing Finance Agency came Thursday, on the heels of a lawsuit directed by major Wall Street firms and U.S.-sponsored mortgage giants Fannie Mae and Freddie Mac against the Bay Area city of Richmond.
Richmond is the first to push forward with the plan, also being debated in cities across the state and nation. Richmond wants to require lenders and investors to sell underwater mortgages at a deep discount. The city would then refinance borrowers into more-affordable mortgages.
The federal housing agency, which regulates Fannie and Freddie, on Thursday made clear it doesn't intend to let this happen. The agency said it would instruct Fannie and Freddie to "limit, restrict or cease business activities" in any jurisdiction using eminent domain to seize mortgages.
BuzzFlash at Truthout wrote a three-part series on the grassroots and innovative efforts of Richmond, an econonmically-challenged city in the Bay Area, to maintain a strong community amidst predatory lending and environmental assaults (by Chevron). One of their strategies is to seize foreclosed (or near foreclosed) homes -- meeting certain criteria -- through the use of eminent domain. As BuzzFlash at Truthout reported, Richmond would then resell them to the residents at current market value through a third party lender.
But yet again the Obama administration is siding with the big bank and secondary lenders -- the very ones that they are fining (while avoiding criminal cases against them) for everything from nationwide deceptive mortgage practices (in poorer communities), robo-signed foreclosures that are often in error, cash bonuses from banks for deceptive practices, and on and on. It's a thieves den list of mortgage abuse, particularly targeting communities of color.
Yet, the power of eminent domain and taxpayer subsidies that is used commonly to build sports stadiums and even expensive housing developments for multi-millionaires (and billionaires) -- as Dave Zirin recently recounted in Truthout -- is the focus of ire and legal threats by the Obama administration when it comes to saving homes for people who want to live in them and build their communities.
But Richmond is not backing down, says the LA Times:
Even with prices rebounding in Richmond, many residents still struggle with outsized mortgage payments, said Richmond Mayor Gayle McLoughlin.
"The fact these threats are being put out there are very, very disturbing — but we are not afraid to go to court," McLoughlin said. "We are looking forward to it, because we think fully that our legal reasoning will win."
Cornell Law professor Robert C. Hockett, who advised Mortgage Resolution Partners on the proposal, said that the federal housing finance agency was acting outside of its authority by issuing its threats.
"How many times must it be repeated that principal write-downs on deeply underwater mortgage loans increase the value of the loans — even while keeping homeowners in their homes and communities intact?" Hockett said. "This is not only illegal, it is disgusting."
The history of using eminent domain to build sports stadiums (and other structures that benefit the private sector, not to mention the increased value of the land) goes back a long way. In the '50s, Pittsburgh displaced some 8000 residents to construct the original Civic Arena, now replaced by the Consol Energy Center.
In fact, the Consol Energy Center, new home of the Pittsburgh Penguins, brings up another point. These stadiums (and again eminent domain is used to acquire private property from the poor and middle class for other purposes that benefit the private market) become branded entities with names not of teams or municipalities or people who have contributed to the common good. The sporting venue goes from neighborhood to stadium to commercially-branded product, and often with large taxpayer support (as in Detroit) for private gain, with little proof that they help in revitalizing a city in almost anyway.
Perhaps -- sarcastically -- the suggestion for Richmond is to have foreclosed homeowners, many of them victims of predatory lending, sell the naming rights to their houses to the banks too big to fail. Maybe the Federal Housing Finance Agency would agree to a community of homes named Bank of America or Fannie Mae or JP Morgan Chase.
Who needs the names of families who are enriched by their homes when you can brand a house with a corporation's name, particularly the one that defrauded the homeowners in the first place? That's justice in the Obama administration when it comes to minorities and home ownership; that's the free market of unjust and illegal practices at work.
Minorities used to be redlined out of mortgage access; now the Federal Housing Finance Agency is threatening, in essence, to revive the practice in Richmond.
Or as Pat Garofalo of US News and World Report wrote about the governor of Michigan's "emergency manager" declaring Detroit bankrupt, while Governor Snyder was giving a few hundred million in taxpayer subsidies to build a new Detroit Red Wings stadium, "Let them eat pucks."
Richmond's eminent domain mortgage plan faces a new concern
Richmond, Calif., which was hit hard by the mortgage crisis, announced recently that it had asked the holders of more than 620 underwater mortgages to sell the loans to the city at a discount. Above are Richmond homes. (Justin Sullivan / Getty Images)
By Alejandro Lazo
August 13, 2013, 4:57 p.m.
There may be a new glitch in Richmond’s strategy to bring mortgage relief to residents using the city's eminent domain powers.
The federal government has raised concerns that participating homeowners may not be eligible to refinance into the kinds of government-insured home loans for which the plan calls.
The strategy adopted by Richmond, which was proposed by its San Francisco partner Mortgage Resolution Partners, would use the city’s eminent domain powers to seize mortgages on underwater properties if necessary. Under the plan, mortgages would be purchased at a discount and homeowners would be refinanced into more affordable loans.
IN-DEPTH: Eminent domain plan for mortgages gains traction in California
Major investors, including mortgage finance titans Freddie Mac and Fannie Mae, as well as a trio of major Wall Street firms, have directed a suit against the city, challenging the plan as unconstitutional and asking a federal court to stop it from moving forward.
Now the back-end of the strategy has been called into question by the very federal agency that would sponsor the kinds of home loans the city planned on for its residents. Those FHA loans — insured by the Federal Housing Administration, which is a part of the U.S. Department of Housing and Urban Development — are popular among first-time homebuyers because they require very small down payments.
The loans are also important to the mortgage relief plan Richmond wants to adopt, because the low-down-payment mortgages help the city and its private investors turn a profit.
But the idea of using government-backed home loans as part of the strategy was called into question this week by Eliot M. Mincberg, an assistant secretary at the housing department, who outlined the department’s trepidation over the Richmond plan in a letter to lawmakers.
“HUD recognizes the serious concerns raised by these legal actions against Richmond, California and the private entities working with the city,” Mincberg wrote. “Pending legal developments and possible further execution of the plans in question, HUD does not know whether any new mortgage which might be created would qualify for insurance by the Federal Housing Administration.”
That would not be the first concern raised by the federal government. Last week, the nation's top housing finance regulator threatened to choke off mortgage lending in cities that use eminent domain to seize underwater loans from lenders.
That salvo came from the Federal Housing Finance Agency, which oversees mortgage giants Fannie Mae and Freddie Mac. Analysts called that move a potential “death sentence” for the city’s mortgage market.
Richmond Mayor Gayle McLaughlin, however, has said the city will press forward with its efforts. In an act of public protest, the mayor plans to “show up” at Wells Fargo Bank headquarters in San Francisco on Thursday to call on that bank’s chief executive to drop the investor suit against the city, according to a press release from the Alliance of Californians for Community Empowerment. Wells Fargo is one of the plaintiffs in the suit -- in its role as a trustee for the mortgage bonds owned by investors -- acting at the direction of investors.
The city became the first in the nation to push forward with the eminent domain strategy earlier this month and could serve as an important test case for the plan’s viability. The city sent out letters to mortgage servicers and trustees, calling on those entities to sell them just over 620 home loans. Those entities had until this week to respond to the city. Richmond officials would then considering using eminent domain to compel the sale of those loans.
El Monte considers eminent domain plan
Richmond, Calif., adopts eminent domain mortgage plan
San Bernardino County abandons eminent domain mortgage plan