One of the most lasting and damaging effects of the 2008 financial crisis is that towns and cities across American are filled with millions of underwater mortgages.
The effect of underwater mortgages on cities is disastrous. A recent investigation by a pair of Princeton and University of Chicago scholars reported on by The Washington Post found that “in Zip codes where more than 50 percent of homeowners were underwater, borrowers cut back five times as much – spending 2.5 cents less on car purchases for each dollar of reduced housing wealth.”
Unable to make ends and meet and pay off their mortgage at the same, many underwater homeowners end up joining the ranks of the more than 5 million Americans who have been forced out of their homes by banksters.
But there may be light at the end of the tunnel.
On Monday, the Bay Area city of Richmond, California sent a letter to 32 banks announcing a tentative plan to buy out the debt of the more than 600 of its residents’ mortgages.
Using its powers of eminent domain – a power provided under the Fifth Amendment to take private land and use it for a public purpose – the city would give 624 families and individuals struggling to make their mortgage payments, new, more affordable loans.
Here’s how the plan would work: Say a homeowner has a $200,000 mortgage on a house that now has a $100,000 market value. Under the rules of eminent domain, the Constitution requires that when the home is taken, that there be reimbursements at market value. So the city would take the home and offer $100,000 – minus $20,000 for fees and costs associated with the process – and write a check to the bank that held the mortgage for $80,000.The bank would write off their $120,000 loss on the deal and both the tax code and federal banking programs would protect them so they don’t lose money. All the bank loses is the profit that it would have made if it continued to hold the mortgage.
The city of Richmond would then offer the homeowner their home back with a new $80,000 mortgage. The homeowner has gone from $200,000 in debt to $80,000 in debt with a $100,000 asset in their house. The city now has one less home in danger of foreclosure, a more stable and realistic tax base, the bank is fine, and the homeowner can begin building retirement equity as they pay off the mortgage over the years. Everybody wins.
Even better news: Richmond’s not the only city trying to rescue its homeowners. Officials in North Las Vegas, Nevada; El Monte, California; and La Puente, California – all cities in the heart of the Sunbelt states hit hardest by the housing crisis – are also considering plans similar to Richmond’s.
As they should. According to a study from the Alliance for a Just Society, “a principal reduction program could produce average annual savings of $7,710 per underwater homeowner nationwide, boost the U.S. economy to the tune of $101.7 billion, and create 1.5 million jobs.”
In Richmond alone, supporters of principal reduction say that “if [that city’s] 4,600 underwater mortgages were reset to the homes’ current market value and current interest rates, the homeowners would save an average of $1,180 a month on mortgage payments.”
This not only keeps homeowners in their homes, it lets them spend money on other things, which stimulates the economy for everybody.
But, as usual, the biggest obstacle to cities that want to help struggling homeowners is Wall Street. The big banks say that any plan to use eminent domain to buy up underwater mortgages is a grave violation of private property rights. Mortgage giant Wells Fargo says that “We believe this approach will harm mortgage investors, the housing market, and the communities and borrowers that its proponents claim they would be helping.” In other words, it’s a threat to their bottom line.
However, big banks aren’t just talking about fighting principal reduction plans, they’re actively sabotaging them. For example, San Bernardino County, California, was forced to abandon its own eminent domain buyout plan last year after fierce lobbying from the financial industry. And as pointed out in The Nation Magazine, three big-bank supported California Congressman sent a letter to Housing and Urban Development Secretary Shaun Donovan in June requesting that he use his powers to block any attempts by any cities to unilaterally give owners new mortgages.
Wall Street may be powerful, but cities like Richmond should ignore their lies and lobbyists.
We need to regrow the economy from the bottom up, and one of the best ways to do that is to move that money going to banksters and putting it back in the pockets of middle-class families.
While Republicans in Washington will block any plan that will make a dent into their Wall Street buddies’ profits, cities and counties have the Constitutional power and authority to make real change in the lives of millions of hard-working American families by using eminent domain powers to push through principal reduction.
So Richmond’s plan isn’t just a model for one California city, it’s a model for the entire country.
Let’s hope they succeed.