Condemn Underwater Mortgages – Martin Andelman
Carpe Domum! The Little City that Could: Richmond, California
THANKS TO MARTIN ANDELMAN
Come with me to the City of Richmond in Northern California. It’s a city that sits 16 miles northeast of San Francisco, directly across San Francisco Bay.
It’s about a 30-minute drive from Richmond to San Francisco; Oakland is only about 20 minutes away. And you can get to marvelous Marin County in just 15 minutes, driving across the truly magnificent Richmond-San Rafael Bridge, from which you’ll see, off to the left, the infamous San Quentin State Prison, once home to such notable murderers as Sirhan Sirhan, Charles Manson, and “The Nightstalker,” Richard Ramirez. San Quentin is, for men, California’s Death Row.
Within a 30-mile radius of Richmond can be found over 3.7 million people, but in the City of Richmond alone, the population is just over 100,000. The city’s largest employers include Chevron, who has a major oil refinery in Richmond, Zeneca, a chemical company, Kaiser Permanente and the Social Security Administration… but Richmond also boasts growing high- and biotech sectors.
Richmond is also a city with 32 miles of coastline, along which can be found large public parks with breathtaking views of San Francisco Bay, city skylines, and even Mount Tamalpais. There are bicycle paths where you can ride, walk or run right along the water. In Richmond Marina, it’s not unusual to see otters and Harbor Seals sunning themselves on the rocks.
It’s not the sort of place you’d expect to find being referred to as the #3 Most Dangerous City in America, in terms of both auto theft and murder, but that was it’s ranking as of March 2010. It’s the second California city to rank in the top ten most dangerous U.S. cities; Oakland’s been at home on that list for a while.
And the City of Stockton, perhaps the epicenter of the foreclosure crisis in California, which filed bankruptcy last year and has since cut something like 40 percent of its police force, is coming up fast at around #16.
Like most of California, Richmond got absolutely clobbered by the mortgage meltdown and subsequent collapse of the housing market… the median sale price of a single-family residence fell from roughly $450,000 in January 2006… to $220,000 today. The Castillo Family, who were interviewed by The New York Times, explained that they paid $420,000, and today their home is worth $125,000.
The stats show 51 percent of homes in Richmond are currently underwater… the average underwater homeowner owes 45 percent more than his or her home is worth… and a jaw dropping 16 percent of Richmond’s homes have already been lost to foreclosure… the end is not in sight.
Losing 16 percent of homes to foreclosure is a remarkable percentage, if you think about it. If you’re having trouble picturing just how high that is, in four more percentage points, one home out of every FIVE will have been lost. Look out your window and count with me: 1, 2, 3, 4, and LOST. 1, 2, 3, 4, and LOST.
That’s pretty efficient foreclosing, don’t you think? How come that’s not happening everywhere?
I’m not sure, but I thought now might be a good time to mention that in terms of racial make-up two-thirds of the people in Richmond come in some shade of black or brown. Only about 30 percent are checking the box marked “office white.” What’s my point? I don’t have one.
So, seven years into the crisis and with those kind of numbers… at least it’s not hard to understand why The City of Richmond is so incredibly pissed off at… well… pretty much everyone in government and the financial sector, would be my guess.
Richmond Ready to Rumble… Carpe Domum! (Seize the Home!)
Led by the city’s Green Party, activist mayor, Gayle McLaughlin, the city is tried of waiting… they decided that they’d feel in more control of their own economic destiny by buying 624 underwater mortgages, in order to write them down to something near market value for their owners.
So, at the beginning of this past August, the city sent letters to 32 banks and trustees with offers to buy the 624 homes… except the letters also said that if the banks and trustees wouldn’t agree to negotiate the price, the city would force their agreement using the powers of eminent domain.
I’m pretty sure the reaction would have been slightly more muted had the city announced that it was set on testing a nuclear bomb in the middle of San Francisco Bay.
The city’s plan is to offer to purchase both current and delinquent mortgages held in private-label mortgage-backed securities… Fannie Mae or Freddie Mac loans would be off limits… and the offer would be at a price determined by an independent appraisal. If no one would sell the city the homes, they’d use eminent domain to make the sale happen.
However, to defend against the accusation that some homeowners used their homes like ATMs, no homes with second mortgages will be purchased by the city. So, if you were one of the people who didn’t buy a new home during the bubble, but instead decided to take out a second and remodel your current home, you’re out of luck, pal. Maybe next time you’ll buy up like every good American should.
Cornell law professor Robert Hockett has developed a technique that would allow the city to use eminent domain to seize the mortgage, as opposed to the home itself.
Can you do that?
Apparently, you can. The question is whether or not a property that is “intangible” can be taken under eminent domain. And Professor Hockett says it can.
According to the Washington Post…
The very first time the Supreme Court heard a case on eminent domain, in fact, had to do with a state taking an intangible form of property. In the 1848 case West River Bridge Company v. Dix, the state of Vermont used its eminent domain powers to take a franchise contract.
The Court argued that the distinction between “property which is corporeal” or tangible and property that is intangible, like the franchise under question, “has no foundation in reason.” They were “aware of nothing peculiar to a franchise which can class it higher, or render it more sacred, than other property.”
Since then, eminent domain cases have come up in everything from sports franchises to stocks, and every time the fact that the property in question wasn’t a physical thing didn’t matter for the case.
Chances are that Richmond will argue that “blight” represents a significant public purpose, and chances are that the courts will agree. It’s no secret that abandoned homes mean crime goes up and a city’s costs go up with it.
Trash piles up around vacant homes, broken windows end up boarded up. And soon families, hopelessly underwater, leave for safer, less costly, and more comfortable homes. Neighborhoods find themselves in a downward spiral from which it becomes impossible.
William Frey, an investor advocate, quoted in the New York Times, said that writing down debt does make sense in many instances, “This is not the first choice, but it’s rapidly becoming the only choice on how to fix this mess.”
Mr. Frey said that the big banks were terrified that if eminent domain strategies became widespread, they would engulf not only primary mortgages but some $450 billion in second liens and home equity loans that are on the banks’ balance sheets. “It has nothing to do with morality or anything like that, it has to do with second liens.”
I’ve heard about this issue before… it’s the seconds that the banks are worried about. The thing is, I feel like I can argue both sides of this topic. One friend of mine who’s been in the mortgage lending industry for years, opined that once a home was taken back and written down, the second is extinguished. And if that’s true… then that’s the problem for sure. But, if the second survives such an event, then I’m not sure why the seconds would be such a big obstacle.
Opponents of the plan include… well, almost everyone in the country.
The opposition says that the results of such a plan would further depress property values, end up costing the city millions in lost revenues and legal fees that would result from the hailstorm of lawsuits that would come, make it impossible for anyone in Richmond to ever get a home loan again, raise the cost of all lending, harm taxpayers, delay the recovery of the housing market, and cause great financial harm to teachers, fire-fighters and “first-responders.” (First-responders? Not first-responders too.)
Quite predictably, the banks are claiming that it’s un-Constitutional to use eminent domain on these mortgages in question, that it doesn’t serve a public purpose and that there’s no way to come up with a workable fair-value offer.
The more interesting argument, however, is that the mortgages themselves don’t physically exist in The City of Richmond, and mortgages not being there could be a problem because the city is only supposed to apply eminent domain within its territory. So, the banks are arguing that because the mortgages were sliced-and-diced, they legally exist… I don’t know… in little pieces perhaps… anywhere but in Richmond.
And I won’t be surprised if some also say the plan may also bring on widespread premature baldness in men and women, accelerate tooth decay and gum disease, destroy the American Dream, lead to war in Western Europe, and leave everyone in the country with restless leg syndrome. Family pets, in a showing of solidarity with pets on Wall Street, have also threatened to leave en masse should the proposal go forward.
Again, per the Washington Post…
“The courts use a variety of tests to figure out where intangible property resides, and it can in turn reside in several different places for different legal purposes. Richmond argues that when considering where an intangible property resides, the mortgages are incurred by Richmond residents and secured by property in Richmond, and there’s extensive case law that this is the important distinction that should be used for eminent domain purposes.
The banks are also arguing that this is a state trying to set interstate commerce for the nationwide housing market, and is thus illegal under a “dormant commerce clause.” The banks also argue that it would violate the Contracts Clause of the Constitution, because the debts of local citizens would be forgiven at the expense of creditors.
However, the Supreme Court has consistently argued that eminent domain supersedes the Contracts Clause. And there’s nothing in this process that would discriminate against out-of-state creditors versus in-state. (Indeed, the creditors who would face writedowns could be in the same state.)
One never knows what courts will do, but in general the argument that this is illegal because of something to do with the mortgages themselves doesn’t seem that strong. Hence the real fighting over public purpose and valuation.
Opponents include, but are certainly not limited to… the Securities Industry and Financial Markets Association, the American Bankers Association, the National Association of Realtors… big investors like Blackrock, have all put lobbyists in the air, flying them to city halls all over the state and, according to the New York Times, they’re also“pressuring Fannie Mae, Freddie Mac and the Federal Housing Administration to use their control of the mortgage industry to ban the practice.”
“Ban the practice?” By order of the GSE King?
In the dirty tricks department, opponents have tried starting rumors. A group of Real Estate brokers in Nevada, reportedly sent out a mass mailer saying that the company helping Richmond, Mortgage Resolution Partners (“MRP”), was hatching a plan to make millions by foreclosing on people who were current on their mortgage payments. Oooh, very scary.
And get this… another group of Realtors in California, WCCAR, has launched a campaign designed to stop Richmond from going ahead with the plan, under the banner, “Stop Corporate Greed.” They’ve apparently been handing out flyers and making calls to homeowners, which must just be confusing the heck out of everyone, especially senior citizens.
Just listen in on the discussion going on below between two of Richmond’s grandparents…
“Margee, my memory isn’t what it used to be and we’re getting so many darn political calls… what are we supposed to be in favor of if we want to stop investor greed?”
“I don’t know, dear. How many choices are there?”
“Well, seems like at least three or four. One of them is supposed to establish death panels looking to kill off senior citizens. I’m not sure I like the sound of that…”
“No, that’s ObamaCare, dear.”
“I thought ObamaCare was the plan to shut down the federal government.”
“No, that’s the Debt Ceiling, dear.”
“But, doesn’t the debt ceiling have something to do with destroying home equity?”
“No, that’s the HAMP loan modification, dear.”
“Oh, that’s right. Well, which one is going to reduce the balance of our mortgage?”
“We don’t have a mortgage dear. We paid it off in 2002, remember?”
“Then how come we’re in foreclosure?”
“Because we live in Richmond, dear.”
“Oh, yeah. So, is it the Democrats or the Republicans that want to stop corporate greed?”
“That’s very funny, dear.”
Not her first rodeo…
Richmond is not the first city to consider this sort of thing, but at this point they’ve gotten a lot farther than anyone else, and last week, when U.S. District Court Judge Breyer dismissed a lawsuit brought by Wells Fargo and Deutsche Bank that claimed Richmond’s plan unconstitutional, the gasp from Wall Street was audible to someone sitting on the dock of the bay.
And Richmond, with a Mayor who has marched with the Occupy movement, and countless other protests ever since she was a child, may just be the only mayor in America, crazy enough to actually try to push this across the finish line.
Some have suggested that she’s bluffing, but I don’t think so. She’s not the type to bluff. She actually does believe this is the way, and I expect to see her brown-bagging her lunch into court, as she does battle with the largest financial institutions on the planet. (I’m thinking something on squaw bread with sprouts.)
The Association of Mortgage Investors (“AMI”) is outraged. They say the economic data shows clearly that housing is recovering and they point to statistics like…
- The rate of homeownership for age 25-34 is now increasing year-over-year.
- Recorded foreclosures fell 20% year-over-year in June.
- The fastest monthly increases in home prices are in the West: San Diego (+2.6%), Las Vegas (+2.4%), and San Francisco (+2.0%).
- Yearly home price increases in the West are also significant: San Diego (17.3%), Las Vegas (23.3%), and San Francisco (24.5%).
(Source: S&P Dow Jones; Case-Schiller)
The AMI is also saying that there’s no need to use a bazooka when a BB gun will do the job. The housing markets are coming back strong, can’t you see that from the bullet points above?. Happy days are just around the corner. A chicken in every pot by Christmas.
I want to be fair about this, and I won’t belabor the point, as I’ve covered this topic so many times, I can’t do it any more unless I’m sedated… but, the numbers above, provided by the AMI, are fiddle-faddle, bunk and hokum all rolled into one.
I’d pay money to debate anyone on this issue on television. ANYONE. I don’t have to worry though, because no one will even debate it with me over the phone and with good reason… I’m right and they’re stupid. (That was a joke, people.)
But, I am right. We have changed nothing in this country that could lead to increased demand for residential real estate, and the fact that EVERYONE doesn’t just see that is insane. We have the same problems we had 5 years ago… the credit markets as related to private money for mortgages are broken, and that makes the government the only real lender. That means loans are hard to get. And that means that demand for homes cannot grow because it cannot be expressed.
We still have most of the buy-up market underwater, or making less money, or without enough money saved for retirement. For those and other reasons, they’re not buying up, and they were always the lion’s share of home buyers.
I have no trouble believing that the rate of homeownership among 25-34 year-olds is e going up, year-over-year, but that’s only because it’s been positively abysmal. And investors, who have been bidding up prices and account for at least 50 percent of the homes sold this past year, are not capable of rejuvenating the housing market… period.
So, throwing these sorts of incomplete factoids around in a city where 51 percent are underwater seven years after the crisis began, and with the poverty rate at 17 percent, and with unemployment at 12 percent… but it’s getting better? Who said that? Let me guess? Mark Zandi… the most optimistic economist on television?
They just don’t believe you anymore. I’ve never believed you, but the people of Richmond just aren’t going to buy into another series of forecasts saying they should hunker down and wait out the storm. Consider these famous headlines that describe prosperity as being imminent… just as The Great Depression was getting started.
“There is no cause to worry. The high tide of prosperity will continue.”
— Andrew W. Mellon, Secretary of the Treasury, September 1929
“The worst is over without a doubt.”
– James J. Davis, Secretary of Labor, June 29, 1930
“I see no reason why 1931 should not be an extremely good year.”
– Alfred P. Sloan, Jr., General Motors Co, November 1930
“The depression has ended.”
– Dr. Julius Klein, Assistant Secretary of Commerce, June 9, 1931
The AMI also points out that there are programs available to mitigate losses and keep borrowers in homes in the event that they become at risk of imminent default.
And no there just aren’t. Well, there are, we all know there are… but they’re
malodourous. Offensive to the olfactory. In large part, they stink.
It should come as little surprise that many of the cities that are considering the use of eminent domain to rectify the damage done by foreclosures were those that were targeted by lenders that steered minority families into predatory loans with teaser and high interest rates, balloon payments, eligible for conventional mortgages.
Look, I’d like to write something positive about the government’s programs to mitigate the damage to the housing market, I really would. But I can’t at the moment, because… Dude, were in Richmond. This is a city that is certain to lose at least 20 percent of its homes to foreclosure in the coming years. They’ve given you seven years to come up with something people don’t entirely despise, and you’ve blown it… totally… seven years later.
Dude, the showers are on. You won’t be batting again during this game.
Cornell law professor Robert Hockett, one of the major supporters of the plan, suggests that eminent domain be used to seize the mortgage, rather than the house itself. As an example, a home that appraised for $200,000 might be purchased for $160,000 and sold to the homeowner for $190,000 (presumably using a government loan?)
(I’m not sure that would work, by the way. I was under the impression that you had to pay the property owner fair market value, not firth grand less than fair market value. But, what do I know?)
After that, a private investment company, in this case, Mortgage Resolution Partners, would be paid to write down the mortgage to something just under the current market value and refinance the loan. The idea being that the homeowner, with a lower loan amount, would then be less likely to default, or would be able to sell without a short sale, thus leaving him or her with more money to spend (hopefully) locally.
The problem, of course, is that the home that appraises for $200,000 might have a $400,000 loan on it now. And the current owner might be current on their payments on that loan. The City of Richmond being allowed to force investors to accept $160,000 as full satisfaction on that $400,000 performing loan is flat out driving bankers and investors (and others) to distraction.
And I can certainly understand that. If that was all there was to it, then I don’t think I would like it either… who would? But, in this particular instance, there’s more to this whole thing than is being talked about in the press.
Why Richmond wants it, and others would rather see Richmond burned to the ground…
Okay, so you’ve got a clear picture of what’s going on with Richmond… now let’s take a look at what’s going on with Richmond that’s causing bankers to go apoplectic.
First of all, in case it isn’t already abundantly obvious, Richmond is not what the ruckus is about. It’s what Richmond’s use of eminent domain could lead to, and I’m not just talking about monetary losses on Richmond’s loans… I’m talking about the potential for Richmond to be the match that started a forest fire that burned out of anyone’s control.
If Richmond were to buy 624 mortgages and investors were to lose $200,000 on each one, the total loss would be a little under $125 million. I’m not saying that’s good or bad, high or low… but it’s not the end of the world, as we know it, that’s for sure.
What’s giving everyone that opposes Richmond’s plan extreme heartburn is that there are plenty of other cities watching to see what happens after the city executes its eminent domain plan, so it all comes down to one’s view of the future that dictates whether someone sees this as a good deal or a bad one.
It really all comes down to how you answer two questions…
The first question is: How many of the 624 loans purchased by the city will end up in default if nothing is done to the borrower’s loans?
If you believe the answer is very few, then what Richmond is proposing is a terrible injustice because investors are being asked to sacrifice a significant amount of money that they believe they would otherwise receive from the borrowers… and all for a public purpose benefit that would be minor or even insignificant.
On the other hand, if you believe that half of them or more will end up in foreclosure anyway, then something should be done, which is not any sort of assurance that anything will be done, obviously.
The second question is: Will home prices in Richmond, over the next five years, increase (and if so by how much?)… decrease (and if so by how much?)… Or, remain flat?
Again, if you think prices will increase appreciably over the next five years, then that should also keep new defaults down and together make the deal Richmond is offering a terrible one.
And conversely, if you believe home prices in Richmond will stay flat or decline over the next five years, then presumably we’ll see increasing defaults and investors could end up coming out ahead taking the city’s offer… from a purely financial perspective, that is.
Investors are NEVER going to like their investments being TAKEN from them, even if it were to end up in their best financial interests.
Make No Mistake About It:
This entire fiasco is being brought to you by the Obama Administration, along with your representatives in Congress and your state legislature.
Okay, so let me say the following, so there’s no question as to how I feel about this, and I’ll sum it up in four points:
- Eminent domain is probably not the right way to handle this. Not because of anything the opposition says, that stuff is all bananas and jam. However, there are many other cities that are going to follow suit if Richmond pull this off somehow, and that will become pandemonium.
- On the other hand, Fannie, Freddie, Wells Fargo, Blackrock, and the rest of you opposition people… you’re treating us EXACTLY like we’re the country of Greece. It’s abundantly clear that you guys only respond to chaos and oppression, and that’s what this is on steroids. I swear, I’ve seen Wall Street type less upset when heading off to spend the rest of their lives in prison.
- During the 1930s, there were 28 states with 5-year foreclosure moratoria… complete bans on foreclosures… Greece has had one in place since 2008. And since you’re treating us like Greece, that’s probably how we’re going to start acting next.
- It’s actually very easy to fix… just come up with a modification program that makes some sense, and doesn’t torture anyone for months on end before surprising homeowners one way or the other. I’m happy to help, and you know where to reach me.
And don’t kid yourselves… you’d better start fixing things now, because if you don’t see the long line of cities and towns lining up to take a similar swing, you’re blinded by quantitative easing and other stimulus.
ONE LAST POINT IN CASE YOU NEED IT…
Dear Richmond… You’re being outright threatened by literally ALL THE MONEY IN THE WORLD, and I don’t think there’s any question that they will, if nothing else, attempt to force you to drop the whole thing by tying you up in then most expensive legal knots the world has ever seen. And they can do it.
So, should that be where this whole thing goes from here, and should you start to get a little wobbly in the knees, here’s something you can do to push back… hard. Remember, you don’t really want to do this. But you do want something to improve related to your housing market so backing down in disgrace is no way to wrap this up.
Mayor, just schedule the City Council for a meeting and approve this measure… I’ll call it “The Scrabble Act.”
Just change everyone address in your entire town. If someone’s address used to be 1234 Main Street… now it’ll be: 223 Black berry Lane. Someone else used to be at 5567 Industrial Way… make them 99876 Speedlight Parkway. Make some of the streets impossible to say out loud, like the unpronounceable symbol that is “Prince.” And others could be colors, as in… “I live at Green on Bond Street.
I know, you’re going to have to figure out some sort of central mail drop, so people can come down and get it themselves. But talk about slowing down foreclosures? The way these banks and courts operate, passing the Scrabble Act may put an end to foreclosures for the next 50 years.
The banks and Fannie Mae don’t even have to be notified of your plan. Just do it, as they say… and PRESTO! The foreclosure crisis will be solved for quite some time. You simply can’t foreclose on what you cannot find.
I truly hope this has been helpful…