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.

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.

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.

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.

Housing Needs for the Next Decade

For local policy makers anticipating the economic landscape in the post-recession and post-foreclosure period, there are three factors that will influence decisions about new housing development – the number of homeless families; the slowdown in household formation; and the severe cost burden that so many face for housing. The combination of these factors means that there will be a much greater need for rental housing than for ownership opportunities in the next decade.

According to figures by the Department of Housing and Urban Development, the number of homeless families increased from 2007 to 2008 and then again from 2008 to 2009. Families constitute 34 percent of the 1.56 million homeless counted in 2009.

Data from the Census Bureau show that the prolonged recession has taken its toll on the number of people starting a household. The 10-year average of new households being formed has been 1.3 million per year. This number has declined significantly to 772,000 in 2008 and to only 398,000 in 2009, impacting rates of rental vacancies and new housing starts, as young singles and couples wait out the worst of the recession in shared living arrangements.

The share of U.S. households that are severely burdened with housing costs (spending more than half of their income) increased to 16 percent in 2008 rising from a steady 12 percent in both 1980 and 2000.  Numbers from the Census Bureau show that a record 18.6 million households faced high housing cost burdens in 2008. Living within these households were 44.2 million Americans including 13.7 million children.

These severe cost burdens for housing exist side-by side with a national vacancy rate for both owned and rental housing units that stand at a record of 14.5 percent in 2009. In this instance, an excess of supply is not having a significant impact on lowering prices for housing except in the cases of buildings with 10 or more units or with expensive rentals.

The catastrophe in mortgage foreclosures, the rising tide of homeless families, the cost of housing for so many and the anticipated demand for rental housing by both the aging baby boomers and the echo boom generation has changed the fundamentals about the kinds of housing most needed in communities. The implications of these data point to a need for construction of more multi-family rental housing units.

Ode to Judges

Judges hold a special place in the American legal system. One might argue that they are in fact iconic, even if they don’t wear the traditional wigs of our British forbearers.

Although more people have probably heard of Judge Wapner and Judge Judy than have heard of Judge Isaac C. Parker – the real “hanging judge” for the Territory of Western Arkansas – it’s not surprising that many of these men and women have achieved the status of folk heroes.

Enter Judge Annette Rizzo and Judge Raymond Pianka of the local housing courts in Philadelphia and Cleveland, respectively. These two leaders are saving homes by ensuring mediation between mortgage lenders and borrowers before concluding a foreclosure proceeding. They are, in the truest sense, working to “establish justice” and “insure domestic tranquility.”

People of a different political perspective may argue about the value of activist judges versus those that exercise judicial restraint. The feature story in the November 9th Washington Post about judges who dismiss a bank’s foreclosure proceeding and return the home to the borrower free and clear is certainly a case for debate. But, regardless of one’s politics, it’s hard to argue with the court’s intent to ensure a process that is swift, certain and fair.

Both Judge Rizzo and Judge Pianka are featured speakers at conferences across the country. Their stories are compelling. Modesty prevents them from suggesting that they are doing anything other than their jobs. But even the most dispassionate observer has to acknowledge that the work they are doing goes above and beyond the call of duty.

Leaders are a diverse bunch. Some come to a task armed with significant governmental authority, such as judges and city elected officials. Other leaders have only their innate skills and the courage of their convictions. Maybe wielding governmental power for benevolent ends is what we expect of Judges Rizzo and Pianka. Nonetheless, society owes them a debt, which likely cannot be repaid, for the herculean effort they are undertaking to help countless homeowners during a time of crisis.

Vacant Properties Compound the Forclosure Disaster

You don’t have to be a policy researcher to know intuitively that mortgage foreclosures and vacant and abandoned properties are a serious threat to the well-being of a neighborhood.  An increase in foreclosed properties in any neighborhood, especially a high concentration of properties in one neighborhood, creates an oversupply of housing stock (including low value distressed properties and short sales) that result in lower prices for nearby properties. This of course has a spillover effect on appraisals, reinforcing the downward pressure on prices. Finally, vacant properties become targets for vandalism, theft or arson. The longer properties sit vacant, the higher the cost to the community at large.

Because the foreclosure process varies from state-to-state, the length of time from a first delinquency notice until the property becomes REO (real estate owned, when title is transferred to the lender at the end of the foreclosure process) can be from a minimum of 40 days up to a year or more. REO properties can languish longer in both weak and strong housing markets because of tighter credit conditions for the average buyer.

The numbers are sobering. There were two million foreclosures in 2009. As many or more predicted by the end of 2010.  The resulting number of potential additions to the inventory of REO properties, according to research by Amherst Mortgage Insight, is estimated at upwards of 7 million properties nationwide.

Local governments are not powerless to prevent this problem. There are strategies that may be implemented in order to prevent properties from abandonment. These include:

  • Vacant property registries
  • Artistic boarding
  • Liens and fines to accompany tougher code enforcement
  • Purchase and resale to occupants or tenants
  • Conversion to rentals
  • Stay Put Notice

For a detailed explanation of these strategies, read the longer article in Nation’s Cities Weekly, NLC’s officials news publication at