For the Love of Eminent Domain

The City of Richmond, California has been abandoned and cast adrift by all those partners who might logically be expected to support local governments facing severe challenges to the local economy and the real estate market. Into the void stepped the private firm Mortgage Resolution Partners (MRP) peddling a grand solution to solve a prolonged and severe disruption in the housing market – use of eminent domain to acquire mortgages with negative equity.

Millions of homeowners have been foreclosed upon in the last six years. California cities have borne a disproportionate share of foreclosures. City leaders in Richmond naturally want to help their residents either by using their own resources or acting in concert with other partners (federal, state, nonprofit, etc.). But everywhere the city looked for timely, serious, and long-term help, no credible partner could be found.

From the Administration came the priority to bail-out banks under TARP, as well as the minimalist Neighborhood Stabilization Program. NSP was so inadequate to the task that its impact proved to be very small indeed. Congress took its pound of flesh in the form of large budget reductions in the Community Development Block Grant program. This is one of the few remaining sources of flexible spending at the local level – spending designed to serve critical housing needs for low and moderate income families. CDBG has become the whipping boy for Members of Congress more interested in centralized control than they are in innovative problem solving.

At the state level, California eliminated the 400 local redevelopment agencies (RDA’s) in 2012 following a state Supreme Court ruling. For decades, those funds had been used successfully to eliminate urban blight and support affordable housing. When he was mayor of Oakland, Governor Jerry Brown used RDA funds to restore the historic Fox Theater. Now those funds are used to help the state balance their mismanaged budget on the backs of cash-starved localities and their low- and moderate-income residents.

And finally, we come to Mortgage Resolution Partners, the white knight galloping to the city’s rescue with a plan to save homes and secure the future of neighborhoods. MRP’s plan however, takes the much cherished and highly valuable power of eminent domain and contorts its purpose and operation to such a degree as to be unrecognizable. Make no mistake, MRP’s advocacy of this strategy will have consequences for cities generally and for Richmond in particular.

If anything was learned in the 2005 U.S. Supreme Court case of Kelo v. City of New London, it is that state legislatures and Congress will look askance at local efforts to overreach on use of eminent domain. Mortgage Resolution Partners does a disservice to cities in urging them to take this approach to help borrowers at risk of foreclosure.

James Brooks is NLC’s Program Director for Community Development & Infrastructure. Follow him on twitter at @JamesABrooks.

Strategies for Transforming the “Rust Belt”

Many cities, especially the old manufacturing centers hardest hit by economic transformation and demographic shifts, are developing and implementing strategies to attract new residents and new investment. Options that have been or are being deployed to once again grow these cities include targeting immigrants and knowledge workers (“creative class”) as well as place-based initiatives focusing on downtowns and neighborhoods or on amenities like the arts, open space and transit. Leveraging the capacity of so-called anchor institutions – partners including foundations, universities and health centers – continues to be an important part of these efforts.

Economist Jeremy Nowak, who also is the Chair at the Federal Reserve Bank in Philadelphia, argues that there are several trends that should help older “legacy cities” grow. Factors he and others view as significant include:

• Suburban and exurban empty nesters seeking urbanized spaces with amenities;
• Adults in their 20’s starting to form new households, albeit often households of one;
• Cities as critical gateways for new immigrants;
• The value of academic and health centers and other “growth nodes” found mostly in cities;
• Knowledge workers and those connected to the arts and to cultural institutions arts and culture congregate in cities;
• Societal trends in support of sustainability, walkability, dense social networks and place making are aligned with the values of the urban environment.

Even a casual observer of cities will agree that challenges remain. Research by NLC and other institutions acknowledge that cities must work through issues of poverty, crumbling infrastructure, low quality schools and general conditions of blight as well as perceptions about the ineffectiveness of government institutions in general. Most importantly, says Jeremy Nowak, “a city must come to terms with the cost of public benefits and the actual worth of those goods or services.”

In order to attract middle class families, a city must provide amenities that have broad public value – great public spaces, transportation systems that connect to jobs, residences and recreation opportunities, places that are safe and clean, and services that are fairly priced. City leaders also must embrace the shared governance and management models (partnerships with CDC’s, neighborhood associations, nonprofits and private sector firms) that offer innovations in delivering public goods and services toward the goal of achieving prosperity for all.

Practical Examples

Baltimore’s Mayor Stephanie Rawlings-Blake seeks to grow the city’s population by 10,000 in 10 years. Efforts include the Vacants to Value program, which is rehabilitating vacant housing and offering home buyer incentives, demolishing 4,000 blighted structures, and leaving some land vacant as green space, urban agriculture plots or adjunct yards for existing homes. The mayor wants to cut city property taxes by 20% (reducing the cost of government in the process) and invest in core infrastructure including mobility strategies. A partnership with the state will invest $1.1 billion in new school construction (10-15 buildings) and rehabilitation of others.

There is useful data to help the city target resources. Research from the Baltimore Neighborhood Indicators Alliance discovered that 35% of neighborhoods in the city (19 of 55) experienced some recent growth. Historic preservation tax credits were an especially critical incentive bringing older houses into prime condition for habitation. Neighborhoods that grew were accessible to roads and transit networks allowing residents to get to jobs, shopping and recreation easier and faster. By contrast, little growth occurred where there is blight and vacant properties. Even where there is good access to mobility networks, neighborhoods with vacant properties are not growing.

In the Idora neighborhood of Youngstown, Ohio, keys to future growth were upgrading the image of neighborhoods, strengthening the real estate market, and engaging large numbers of residents in the renewal process. The goal was to rebuild confidence so that property owners again would be willing to invest both dollars and time in owning and managing a quality home and community. The city’s Lots of Green program acknowledged the need to manage empty space in neighborhoods and encouraged the active role for residents.

Geneva, New York undertook image building initiatives to first create and then strategically market a dozen unique neighborhoods. Working through the city’s Office of Neighborhood Initiatives and in partnership with volunteers from the Geneva Neighborhood Resource Center, residents are engaged in a process of setting standards they expect from their blocks and houses.

Some revitalization tasks are symbolic like creating a neighborhood mural or new place-centric signage. Other tasks strengthen the real estate market through rehabilitation and sale of formerly vacant houses, aggressive promotions of neighborhoods with the help of real estate agents, and targeted first-time homebuyer incentives.

Other, more tangible efforts, such as strengthening grass roots community associations that engage in problem identification, assessment and solution, often depend on support from city government. That support may take various forms such as advocate, facilitator and champion. I believe that an essential role for city government is to help make recoveries possible by using grants, special lien programs, and clean-up assistance to support confidence-building efforts implemented by residents in concerts with local nonprofits or other community-based institutions. Through such actions, cities create an enabling environment for actions by community stakeholders.

Future Thinking

The analysis presented here was gathered during a forum that brought together thought leaders from the cities of Baltimore, Cleveland, Detroit and Philadelphia. These leaders were convened by the Funders Network for Smart Growth and Livable Communities and four of the Federal Reserve Banks, with NLC as a supporting partner. Three more such gatherings will be organized during the balance of 2013 and into 2014. In our role of knowledge partner, NLC will contribute to these cross-city discussions but also facilitate the dissemination of knowledge beyond the four target cities.

Financing Housing

A number of discussions were held during NLC’s Congress of Cities on the topics of housing, housing finance and home mortgage foreclosures.  From these discussions a picture emerges that is hopeful at one level but deeply troubling at another.

Despite the improvements in the housing sector in the form of sales prices, construction permits and foreclosure declines, mortgage financing remains a complex and risk-prone proposition.

The S&P/Case-Shiller 20-city home price index is up for 18 metro markets (New York and Chicago excepted). Prices are up 7 percent through the first nine months of 2012 which is the strongest performance since 2005.

However, mortgage financing through FHA still accounts for a much higher proportion of mortgage loans than is desirable or sustainable over time. The status of Fannie Mae and Freddie Mac remain unpredictable and are a source of continued anxiety in the market.

More disturbingly, the massive losses from securitized mortgages in the portfolios of the GSE’s are an ongoing drain on Federal resources and the taxpayer. The Federal Reserve is buying up on average $40 billion per month of Fannie and Freddie mortgage backed securities.

Mainstream financial institutions need to return to the market for mortgage origination for the average consumer. Improvements in the housing and real estate markets and rising demand may eventually lure banks back into this business. But the unknown and unpredictable disposition of a fully functioning secondary mortgage market will inhibit increased private sector involvement.

Until some kind of reform is implemented for the GSE’s the Feds will continue to be the lender of first resort and the great and powerful guarantor of all risks in the market. That is, and will continue to be, an untenable position.

Foreclosure Fatigue Sets In as Housing Market Improves

Imagine my surprise at how quickly the attention paid to mortgage borrowers suffering through foreclosures, short-sales and default notices is quickly abandoned as good news continues to arrive in the form of rising home prices and sales. As with wars, famines, natural disasters and celebrity meltdowns, issue fatigue is finally sweeping the mortgage foreclosure crisis into a neverland of footnotes and asterisks.

It’s fine to celebrate positive housing news. Sales of new single family homes surged 5.7 percent in September to a seasonally adjusted annual rate of 390,000, the highest level in 2 ½ years. September year-over-year increases were 27 percent. Census figures earlier in the month reported a 15 percent increase in new housing starts during September and an 11 percent increase in building permits.

Nearly all the numbers focusing on housing show improvement. But the experience of the 21st Century’s most significant economic recession ought to remind us that numbers are inherently selective. By the time this housing debacle finally ends nearly 5 million Americans will have lost a home and be left with credit so badly damaged they won’t qualify for a mortgage until well after the next Presidential election. And if rules are adopted that demand larger down payments and smaller debt-to-income ratios, the Millennials won’t be buying houses until they reach their 40’s.

Arguably, the “crisis” has abated and it’s hard to focus on housing when confronted with World Series baseball, Dancing with the Stars and a new Tom Hanks-Halle Berry movie. Fatigue is real and if we get tired of floods and wildfires and famine, the plight of the “dislocated homeowner” hardly warrants any greater attention.

But while fatigue may be understandable, the out and out thieving actions by state governments of the funds dedicated to housing from the National Mortgage Settlement is not only intolerable but possibly criminal. In a report from Enterprise Community Partners researchers discovered that nearly half of state governments are bleeding off portions of the funds allocated to help states pay for housing counseling, mortgage mediation, legal aid and other housing programs to instead address shortfalls in state general fund budgets.

Among the worst offenders are Alabama and Georgia, the latter which sent its entire $99 million share of funds to economic development programs. Missouri used its $39 million to prevent higher education cuts. California used $410 million from its share to fill budget holes for its $15 billion deficit which did include some old debt service on affordable housing bonds. The South Carolina legislature, over the veto of Governor Nikki Haley, and sent its $31 million share to business attraction programs and to the general fund.

The mortgage settlement intended that a modest $2.5 billion, out of $25 billion overall, go to help distressed homeowners facing the calamity of losing a home. In the absence of more federal money to stabilize neighborhoods and preserve communities this sum offered a considerable level of assistance. If the well of sympathy as indeed gone dry, the very least that can be expected is that those who have been provided for in the mortgage settlement get what is due to them without any interference by revenue-hungry states.

California’s Homeowner Bill of Rights Provides Solutions

Political leaders at the state and local levels in California have delivered not one but two aggressive efforts to address the home mortgage foreclosure crisis. One effort, the Homeowner Bill of Rights, is likely to be a powerful stick which will help borrowers negotiating a loan modification from nearly all banks and mortgage servicers. The other effort, an attempt by San Bernardino County and nearby municipalities to use eminent domain powers to modify mortgages, has run into opposition from several quarters and may prove unfeasible.

The recently signed Homeowner Bill of Rights law does a few things that even the national mortgage settlement agreement between 49 states and the nation’s five largest loan servicers does not. First, the law applies to all banks (with a few exceptions for very small ones) not just the big five. Second, the law provides a private right of action for borrowers against banks who demonstrate “significant, material violations of the law.” Hopefully, this will eliminate any vestiges of the “dual track” practice where servicers continued a foreclosure process even while at the same time negotiating a loan modification with the borrower. Coincidently, this dual-track practice already is illegal under the Home Affordable Modification Program (HAMP), but it continues nonetheless.

The proposal concerning eminent domain is an effort to render some further assistance to underwater borrowers. Legal scholars are now dissecting the reasoning behind this proposal. Questions surrounding issues of public purpose and just compensation valuation are only the most obvious matters for attention. The partnership with Mortgage Resolution Partners (MSP) needs explanation since this firm will ultimately receive the mortgages in some as-yet-unknown transfer process. Finally, the necessity of protecting investors in mortgage backed securities, while unpopular with many, is nonetheless an underlying principal of contracts which cannot be ignored even to help underwater borrowers.

One only needs some awareness of politics as opposed to law in order to understand why the eminent domain proposal is facing so much opposition from banks, real estate agents, title companies and chambers of commerce. Following the rightly-decided U.S. Supreme Court decision in Kelo vs New London, which upheld an eminent domain action by a local government, various states tightened the laws under which local governments could exercise eminent domain authority. The victory handed to localities by the Court was very quickly curtailed by many state governments because of the perceived lack of public purpose evidenced in the Kelo case.

The desire on the part of local officials in San Bernardino County to help homeowners has led them down a path which while creative in the near-term may run counter to the longer-term interests of local government autonomy. In short, by taking a broad reading of eminent domain powers there is some risk to local governments in California and elsewhere. The possible consequence is mobilization of opposition to such a viewpoint within state legislatures and in Congress resulting in action to eviscerate local eminent domain authority across the board.

Who’s Afraid of Renters?

Perceptions seem to be changing but there remains an unfortunate bias against renters. In a recent essay in the Wall Street Journal (May 4, 2012) author Daniel Gross [Better, Stronger, Faster: The Myth of American Decline and the Rise of the New Economy] offers this characterization. “In the American mind, renting has long symbolized striving – striving, that is, well short of achieving.”

Millions of Americans rent; some 34% of them in fact. According to the Census Bureau’s Current Population survey, 42% of renters are under 30 years of age and 17% are over 65. How is it that anyone can lump together so many seniors and Millennials and then suggest that somehow they are not essential elements of the American mainstream that deserve choices in housing?

Renters are transient and disconnected the critics argue. To be sure, renters without children, both young and old, may be disconnected indeed from schools; the one basic hometown institution mostly supported by property taxes. However, from this observation it is a far and dramatic leap to suggest that renters by their very nature are disconnected from the community at large. What models of citizenship are we promoting that equate the value of contributions to a society by the dollars collected through a tax on real property?

Today renters are helping to stabilize and even save neighborhoods devastated by foreclosures just by the act of moving in.  Beyond their physical presence, renters bring income, purchasing power and the foundations of community.

People chose to live in the best place that they can afford.  That best place often has a mix of employment opportunities, welcoming neighbors, and some amenities such as open space or retail shops or entertainment venues.

Being welcoming to new residents regardless of their housing preferences is an act of good faith by a city. By using an inclusive approach, a city can demonstrate that it seeks to attract people of energy and talent to build a life for themselves and for those they hold dear. Such an attitude proudly declares that a community wishes to serve and support a diverse and unique corps of residents.

Screaming for Housing Demolition

In a country that cannot adequately house all of its citizens, both government and private-sector actors will bulldoze more than two million homes in the time before us. Implemented on a vast scale already thanks to dollars from the Neighborhood Stabilization Program (NSP), the pace of demolition will quicken as the winter months recede.

It does little good to dwell on the arguments made under the guise of practicality. Practicality dictates the sacrifice of one part of a neighborhood over another part. It’s as if all of America is now a metaphor for the Vietnamese provincial capital of Ben Tre where “it became necessary to destroy the town to save it.”

What was once spoken only in whispers is now a loudly advocated policy proscription ( Gone is the rhetoric promoting home ownership as the principal path to wealth and prosperity for millions of families seeking a foothold in the ranks of the middle class. Gone too is the rage at the most recent example of “creative destruction,” as house after house collapses under the blade of the bulldozer.

If cities and counties are now going to ask for money to demolish existing housing, however dilapidated,  let’s at least take the moment necessary to fix in our minds the lessons that brought the country to this situation.

  1. An over-emphasis on home ownership, and the tax benefits that accompany it, over any other option of residence;
  2. The characterization of home ownership as a superior tool for wealth creation rather than simply an economical method of domesticity and family stability;
  3. An over-reliance on home construction as a central component of the local, regional and national economy;
  4. An over-abundance of state laws that prohibit mixed-use development; and
  5. An over-reliance on the market to police itself against fraudulent mortgage processes and risk underwriting.

It costs upwards of $10,000 to tear down a modest single-family home. The price increases geometrically when one crumbling townhouse must be separated from another. Beyond the money, the far greater price we pay comes in terms of the lost opportunity to reduce the nation’s ill-housed population closer to the desirable level of zero.

The Goal is Diverse Housing Choices

Housing has always been complicated; it’s just that most folks never really noticed until the decades-old pattern of increasing home construction and increasing home values came to a blinding, crashing halt. Now the complexity is abundantly apparent – rent or own, access to credit, overleveraged mortgage loans, accurate risk underwriting, affordability, proximity to employment, patterns of land use and zoning, family income and income to debt ratios. Small wonder that pre-mortgage loan counseling continues to be a growth industry.

Despite the fact that the home construction and mortgage finance industries are a big part of the U.S. national economy, one’s views about how and where people live cannot be confined simply to the economics of housing. Lost in the debate over the future of Fannie and Freddie and possible rules that will require larger down payments for a mortgage loan is the basic matter of what kind of shelter is available in which location and for how large a price. Adjacent to that issue is whether government is being helpful or harmful to those in need of shelter.

For example, is it helpful to permit homeowners to build small separate dwellings (cottages by any other name) on what are otherwise single-family lots, as has been allowed in Seattle? Is it helpful to enshrine in law a requirement that financial institutions operating in cities and towns make equitable loans for housing and small business investments to all persons with reasonably similar credit worthiness and that those institutions do so without regard to race, gender, age, faith or an arbitrary line on a map that divides a “good” neighborhood from a “transitional” one? Is it helpful to subsidize ownership, or are home owners and home renters equally desirable members of a community whose energy, talent, and public spiritedness have made places like Dudley Street in Boston one of the most desirable and progressive neighborhoods in any city?

But alas, these are not the questions being asked in Congress nor in the State House nor in City Hall. In Congress they ask, will requiring a 20% down payment for the cheapest mortgage loans prevent another mortgage foreclosure meltdown?  The simple answer is a resounding NO. There is ample evidence to prove that down payments as low as 3% to 5% are perfectly adequate when proper underwriting is carried out and where income documentation shows adequate monthly cash flow.

In City Halls, where land use rules drive choices in housing, the perpetual questions are over where to build, what to build and how to build. But little attention is paid to the questions that consider housing options. For example, is there an option to site-built homes? Is there an option to building height, width and materials rules? Is there an option to lot size, set-backs and garage dimensions? In a country with a growing population in need of decent and affordable housing these are the questions that need to be addressed. Cities and towns can’t grow if government won’t allow more choices in housing.

So the conclusion returns to full circle to the premise. Yes, housing issues are complicated, but the fundamental goal is not. Government leaders must adequately house everyone using every variety of shelter option available to serve a diverse and growing population.

We All Might Want to Walk to Breakfast

I’m supposed to want a rambling four bedroom colonial with a two-car garage on a cul-de-sac, given my demographics of age, marital status and educational achievement. Big surprise: that’s not what I want.

Seriously, who actually wants to get in the car every time there is a need for a loaf of bread, a light bulb, a birthday card or a take-out meal? Why would I want that?

Urban neighborhoods are supposed to attract younger singles in their first apartments and first jobs. Persons with tons of disposable income also succumb to the lure of downtown chic.  I can tell you, I’m no longer young and single and certainly am not rich. But neither am I a statistical anomaly.

I chose the city because of its employment opportunities and its network of air, rail and mass transit services. After years of living in a rental apartment and saving money for a big down payment on a house, I was ready for a home purchase. My preference was a townhouse neighborhood within walking distance of all the amenities I might desire.

The quality of schools was an important factor, even before the arrival of any children into my family. The average cost of living was a factor, but the costs throughout the region are generally on the high side regardless of a specific zip code. Safe streets matter along with a sense of community among neighbors. I sought out a place where people were prepared to act in concert for the betterment of their shared block and street. For me, the Orange Hat Patrol was not a sign of high crime rates but a symbol for united neighborhood action.

Knowing the difficult automobile commuting patterns in my region, I made a deliberate decision to live in a smaller house in the center of the city, rather than a bigger property at greater distance. My street is decidedly middle-class, safe and clean. There are trees, sidewalks, gardens, dogs, public pools, shops, restaurants, a farmers market and transit.

So this is my choice. I can walk to breakfast. Where I chose density, diversity, destinations, distance to transit and interesting urban design, others in my exact situation chose differently.

But now the critical question: How can we ensure that everyone gets to make a choice from among a broad set of truly valued options? Is this the task of government; to guarantee equality of opportunity?

For the policy maker, there will always be a debate about how much government support is given to the student, the job seeker, the mortgage borrower, the entrepreneur, the elder, the differently-enabled and the veteran. However, an array of good choices, whether for schools or houses, ought to be available to everyone on an equitable basis. That’s the common promise that “We the People” expect from those we elect to serve our interests.

An Essential Role for Fannie and Freddie

For all the talk about reform of the mortgage finance system, the anticipated changes to Freddie Mac and Fannie Mae are likely to be rather modest. In the run-up to Secretary Geithner’s end-of-January deadline to offer a proposal to Congress, only two options are under serious consideration to support the goal of ensuring long-term liquidity of the market for mortgage credit.

Option one envisions a model akin to the present government sponsored enterprise (GSE) but with a tighter oversight regime to protect the explicit taxpayer guarantees. Option two is a privatized model with a tight oversight regime and no explicit guarantee of government protection. Arguably, not much difference when you consider that the major investment banks were private institutions with neither an implicit nor explicit guarantee of solvency, but they received a federal bailout via the TARP law anyway!

While there seems to be some general consensus that more aggressive and transparent oversight will help ensure liquidity of mortgage capital and prevent a repeat of the present foreclosure crisis, there is less agreement on whether Fannie and Freddie should be in the business of supporting and promoting housing for the vast population of those with modest incomes and limited access to market rate credit.

Limiting Fannie and Freddie to a mission focusing only on liquidity means that the President and Congress will be left to the task of setting and implementing goals for affordable housing and broad based access to credit for underserved citizens. Given the limited effectiveness of measures, such as the Community Reinvestment Act, which was designed to accomplish just such purposes, one can be forgiven for not putting much faith in Congress and the Executive.

Perhaps, if the lessons of this crisis are well-learned and if new accountability procedures are well crafted and properly enforced, a reformed Fannie Mae and Freddie Mac are exactly the institutions able to help meet the nation’s goals of decent and affordable housing for a large portion of the citizenry. Moreover, The National Housing Trust Fund already authorized in law and waiting funding through an invigorated earnings portfolio from the “reformed” GSEs, would certainly bring a measure of stability to the housing market. For evidence, see the hundreds of affordable housing trust funds that already exist and operate efficiently and effectively at the state and local levels.