Courtesy of Richard Metzger of Dangerous Minds
Over the weekend, there was a fascinating article about the foreclosure crisis in Southern California that appeared at the Huffington Post with the title “San Bernardino Eminent Domain Fight Closely Watched By Other Struggling Communities.” That title might not have grabbed you, but what’s in the article, penned by Ben Hallman, is extraordinary and needs to gain more traction.
If you read what’s written there and disregard all of the “opinion” (what Rahm Emanuel and the banking PR flacks have to say) and just concentrate on the plan of action that’s being offered to deal with the mortgage crisis, it’s a winner.
It’s being proposed that “eminent domain,” the power local government have to seize property for the common good, be employed to help stressed communities in San Bernardino County. The idea for this originates with Steven Gluckstern, the executive director of Mortgage Resolution Partners: Local authorities could seize home loans—not properties—and “condemn” the ones that were underwater, though not in arrears, and held by private trusts. The local government would then forgive the debt in excess of current market value of the home. Homeowners could then refinance at the new, lower value, freeing up hundred of dollars per month, and boosting the local economy and jobs growth. The pension and institutional investment funds that actually own these loans would get paid fair market value. For investors in Inland Empire property, this will mean taking a significant haircut.
It’s estimated that there are around 150,000 homeowners in the county who owe more on their homes than they are worth, yet only a small percentage of them would actually qualify for a loan modification because their credit is bad.
One estimate sees as many as 42,000 homeowners in San Bernardino County benefiting from the plan. It would have a significant impact on the lives of county residents.
It’s also a beautiful solution that fucks over the capitalist greed-heads who deserve it the most. They made investments in bad securities. That’s capitalism, baby! Shit happens!
It’s thrilling to think we could be on the verge of seeing something like this occur:
This old railroad town in the heart of the Southern California foreclosure belt doesn’t attract many visitors these days, especially not in the blazing summer heat. Yet on a recent Thursday morning, a handful of well-heeled business travelers from the East Coast hurried along a sidewalk to address a government official they have come to know well.
Gregory Devereaux is the chief executive of San Bernardino County and its 2 million residents. At his urging, local authorities are considering a proposal that would allow local governments to exercise their power to seize private property without landowners’ consent in a dramatic—some say radical—new way.
Governments usually use this power, known as eminent domain, to acquire private land for public purposes, such as roads or utility lines. But this plan, proposed by a San Francisco-based venture fund Mortgage Resolution Partners, calls for government authorities to seize the mortgages of underwater borrowers, paying the investors that own them a fraction of what they are owed, using money borrowed from the fund. Homeowners could then refinance with a federal loan at a much lower rate, based on what their home is actually worth instead of what they owe.
Supporters say the plan would send a supercharged bolt of energy into the housing market, spurring economic development and preventing even more of the foreclosures that have wrecked many communities.
“It is a disaster of epic proportions,” said John Vlahoplus, chief strategy officer at Mortgage Resolution Partners, of the dramatic decline in home prices that in many areas has left homes worth less than half what the borrowers paid. “The crash has devastated the family wealth of these communities.”
Gregory Devereaux… you are my new hero.
You’ve met the good guys, now meet the bad guys (so to speak):
The group from the East Coast, representatives of the mortgage finance industry, don’t like this idea much at all. They have worn a path to Devereaux’s office in recent months to tell him, and anyone else who would listen, that the proposal amounts to nothing less than a threat to the entire mortgage finance system, and an assault on free enterprise and the U.S. Constitution.
They’re sort of right about that, but have you been in San Bernadino County lately? It’s very very easy to see why a plan like this would be popular in the Inland Empire: It’s getting to be just like Mad Max there. The local economies will never recover with so many residents underwater on their mortgages. If you owe $400,000 on a house that’s worth $150,000, tops, not that you could sell it anyway, just what the fuck are you going to do next? What if you lose your income? Then what’s your move?
You don’t have one. The bulldozer-like plan that Mr. Devereaux is proposing has the potential to change the lives of tens of thousands of desperate families in his county. He’s worried about them, not about some bankers, mortgage brokers and fat cats taking the hit. (Did I mention yet that Gregory Devereaux is my new hero?)
Absent something like this, how would the Inland Empire EVER be expected to recover? It probably won’t be during many of the current generation’s lifetimes, we’re talking decades to recover. Seriously, it’s fucking GRIM there. Really, really super grim. (Comparing parts of San Bernadino to Mad Max is only a slight exaggeration, trust me)
[“Blah, blah. blah” said mortgage industry spokespeople. “Blah blah blah blah blah blah blah” said someone else. Back to what matters…]
Proponents, meanwhile, argue that bold measures are worth considering in the face of a festering foreclosure crisis. Recent modest increases in home prices have done little to help the estimated 16 million underwater homeowners nationwide, who, according to the real estate valuation website Zillow, collectively owe $1.2 trillion more than their homes are worth.
The proposal also comes amidst broad frustration with the Obama administration, which has so far refused to offer a broad-based plan to bail out underwater borrowers, even as taxpayers have spent hundreds of billions of dollars to prop up banks.
“We’ve seen a bailout of the banking industry, but no bailout for homeowners,” said Arie Giddens, a San Bernardino resident whose home is worth less than half the $300,000 she paid for it in 2005, according to Zillow.
About a dozen communities have voiced some level of interest in the eminent domain plan, including Chicago, Sacramento, New York’s Suffolk County and most recently—according to sources familiar with the discussions—Detroit. Not coincidentally, these communities have also been particularly hard hit by the housing crisis. In San Bernardino County, more than half of all homeowners are underwater, and the foreclosure rate is three-and-a-half times the national average.
“Everyone here has a friend or a family member who has lost their home to foreclosure,” said Greg O’Donnell, the development director at Neighborhood Partnership Housing Services, a housing nonprofit in Ontario, Calif.
At the public hearing, Devereaux said the eminent domain plan is still far from reality.
“Thank you very much,” he said more than once in response to the mortgage industry lobbyists’ criticism of the plan. “We appreciate your involvement.”
Gregory Devereaux, you are a badassmotherfucker…
Nothing had been decided yet, he cautioned. Mortgage Resolution Partners has not even submitted a formal plan yet, he said.
What worries the finance industry is that nothing has been ruled out, either.
Officials in other jurisdictions, by all accounts, are waiting for someone else to make the first move. That someone, if it is anyone, will likely be Devereaux. What he thinks could determine whether the eminent domain proposal winds up on a scrap heap of failed ideas to resolve the housing crisis—or sets new legal precedent on the way to providing mortgage relief to a population at the highest statistical risk of losing their home to foreclosure.
It has come to this: More than five years after home prices fell like a rock into a well, the last hope for some borrowers stuck at the bottom could be a public official unknown even to many citizens of his own county.
On Thursday, Mortgage Resolution Partners announced that they are expanding their original proposal to help individuals underwater on their mortgages by including homeowners who have defaulted or are delinquent on their mortgages.
Keep in mind that this is not all bad for the investors themselves. There’s a (theoretical) “silver lining” upside for them, too: Laurie Goodman, of Amherst Securities, analyzed the potential impact of eminent domain mortgage write-downs: “Taking select loans out of a trust could conceivably result in a higher realized value for (the) investors,” Goodman wrote. “Using eminent domain is a novel (albeit aggressive) idea to reach this goal.”
Banks holding loans already use formulas to decide how far they can write down a mortgage and still make money. The same should hold true for mortgages held in trusts, at least that’s the theory.
The top regulator at the Federal Housing Finance Agency, has warned that the agency might “take action” against San Bernardino County should it decide to adopt the Mortgage Resolution Partners. A highly visible supporter of the plan is California’s lieutenant governor, Gavin Newsom. This could get really interesting.
Gregory C. Devereaux, Chief Executive Officer for the County of San Bernardino, California
Thank you Michael Backes!