The foundation of a true recovery is to guarantee that all people have access to shelter. The authors propose to effect this by stopping fraud in the existing housing and housing finance markets and by creating new vehicles for home ownership.
If you listen to the mass media, you may be under the impression that the housing crisis that erupted in 2008 has come to an end. The truth is that the same big banks which crashed the economy through fraudulent and risky behaviors are the main ones cashing in on the millions of foreclosed homes by scooping them up and turning them into rental properties. Ironically, families displaced by fraudulent eviction may find themselves renting out another displaced family’s home.
While big banks and investors prosper, families, businesses, the local government, in fact all other members of a community, are suffering from loss of stability and wealth, deteriorating neighborhoods and an increased demand for social services at the same time that public revenue is declining. Everyone in the community is affected by the housing crisis, whether or not one loses a home.
Former realtor Nancie Koerber and her colleagues at Project REconomy in Southern Oregon set out to improve their struggling local economy and found that the most important first step was to stop the hemorrhaging of families experiencing foreclosure. Using the legal and legislative systems, Project REconomy has succeeded in exposing the ways that big banks broke their state laws and has stopped them. Their efforts so far have resulted in thousands of families statewide staying in their homes who are now able to pick up the pieces and create greater financial stability for themselves and their communities.
The rise and fall of the housing market and the ongoing false housing recovery bring into question the practice of using housing as an investment tool. At what point is it acceptable to engage in practices that place profit over people’s needs for shelter? Are there other ways to approach the basic necessity for housing that protect people and the community from predatory lenders?
Throughout the United States, there is a growing movement for both cooperative housing and placing property into community land trusts. Both practices help ensure permanently affordable housing by removing it from the ups and downs of the market. The city of Richmond, California, is using eminent domain to seize properties with underwater mortgages and resell them at a reduced cost to the original homeowners. Approaches such as these are essential to stabilize communities so that they can recover from the recession and begin to thrive.
Foreclosures Hurt Everyone – Except Wall Street
The housing bubble and its subsequent crises are a perfect example of the near-sightedness of those who seek profit with impunity. While housing prices were rising, the large banking and financial institutions were tripping over themselves to rush through mortgages, bundle them, sell them to investors and sometimes even go on to bet against the bundled derivatives that they sold.
Financial fraud analyst William K. Black writes that “During America’s housing bubble, mortgage originators were told to do whatever it took to get loans approved, even if that meant deliberately altering data about borrower income and net worth.” In addition, the value of homes was exaggerated by intentionally inaccurate appraisals, while honest appraisers were blacklisted by lenders. Not only was altering data to push through a mortgage common practice but banks did not disclose to financial firms that many of the mortgages they were selling had second liens on them, which made them more likely to default.
These practices created what are known as “liar’s loans.” Half of all subprime loans and 40 percent of all new real estate loans in 2006 were “liar’s loans,” and the number of fraudulent loans that were sold to investors increased as the bubble expanded.
A recent court case against J.P. Morgan revealed that the investment firm knew it was engaging in fraudulent and risky behavior. Internal emails document that quality controls were not followed and problems were hidden. For example, high risk mortgages were “bundled into complex securities, [which] appeared healthier, making the deals more appealing to investors.” And, J. P. Morgan was not the only institution involved in this practice.
Black writes that the housing crisis is what drove the entire financial crisis: “Given the massive number of liar’s loans and the extraordinary growth of liar’s loans (roughly 500% from 2000-2006), it is clear that that they were the ‘marginal loans’ that caused the housing markets to hyper-inflate and created the catastrophic losses (in the form of loans, MBS, and CDOs) that drove the financial crisis.”
The banks are making it as hard as possible to investigate their practices. This April, Federal Reserve staff argued that documents relating to widespread legal violations are “trade secrets” of mortgage servicing companies. The staff from the Office of the Comptroller of the Currency argued that these documents should be withheld from members of Congress because producing them could be interpreted as a waiver of their authority to prevent disclosure to the public of confidential supervisory bank information. Mortgage fraud practices are trade secrets – does this make any sense?
True to their nature, big banks continue to engage in fraud and investment firms are finding ways to profit from the bursting of the housing bubble. Another recent court case revealed that Bank of America employees were told to lie to customers who applied for mortgage assistance and regularly denied requests en masse in a practice known as a “blitz.” Employees were rewarded with cash bonuses and gift cards for foreclosing on ten or more properties in a month. Banks are also holding on to an estimated 7 million properties in order to create scarcity and keep housing prices stable.
This approach is proving to be lucrative. Large investment firms are greedily gobbling up foreclosed properties in order to rent them for a few years until the properties can be sold at a profit. For example, in Las Vegas, most of the homes are being bought by groups like Blackstone Group LP, Colony Capital and American Homes 4 Rent, and 60 percent of purchases are being made in cash. Nationally, home ownership is at its lowest level in 18 years and first-time home buyers are a very small part of the current market. Individual homebuyers cannot compete with big finance even if they are approved for a new home loan.
This means that the so-called housing recovery is misleading. It is based again on speculation rather than on the purchase of homes for a place to live long-term. Investment firms are likely to bail out of real estate and put their money elsewhere at the first sign of reduced profitability, as economist Dean Baker warns. There may be another bursting housing bubble in America’s future as a result of this false economy.
Wall Street is relatively protected from the housing crisis. Due to globalization, Wall Street can move its money and invest wherever the returns seem the highest. But the rest of us are hurt by the housing crisis even if we do not experience foreclosure, as one in five American families does.
Dean Baker writes that reduced consumption related to the housing crisis resulted in a loss of $400 billion, or 2.5 percent of GDP, to the overall economy in the US. But most of the damage has been done at the level of the individual and community.
Foreclosures lower the value of surrounding homes by an estimated one percent. As home values fall, spending and new construction also decline and this creates a negative cycle of higher unemployment and more foreclosures in the community.
A report by Responsible Lending shows that foreclosure has a significant effect on health. People who are experiencing foreclosure are less likely to keep medical appointments and nearly half do not fill prescriptions. They experience higher rates of depression and suicide attempts. And the report found that in communities with higher rates of foreclosures, there were also higher rates of hospitalization for conditions related to diabetes and high blood pressure.
Foreclosures create a greater financial burden for local governments through lost tax revenue, an increased need for public social services and direct costs to maintain foreclosed properties. A report by the Brookings Institution found that poverty rose in the suburbs by 67 percent from 2000 to 2011 and that this is straining social agencies in those areas that were unprepared to handle the increased needs.
And it is not surprising that the effects of the housing crisis weigh most heavily on communities of color. Another report by Responsible Lending documents that “nearly 8% of both African-Americans and Latinos have lost their homes to foreclosures, compared to 4.5% of whites. The racial and ethnic disparities in these estimated foreclosure rates hold even after controlling for differences in income patterns between demographic groups.”
The First Step is to Stop Foreclosures
In the current economic environment where most families lack significant savings or retirement funds, the loss of a home means losing their largest source of wealth. A May 2013 report, Wasted Wealth, indicates that “three years after the reported end of the Great Recession, the foreclosure crisis continued to destroy wealth on a large scale in 2012, with $192.6 billion in wealth lost due to foreclosures across the U.S., an average of $1,700 in lost wealth per household for each of the country’s 114.7 million households.”
And the report indicates that the housing collapse is not over. In fact, “there are at least 13.2 million underwater mortgages (when a homeowner owes more than the home is worth) on the books. The Congressional Budget Office estimates that 13% of underwater homeowners are already ‘seriously delinquent’ on mortgage payments – they are foreclosures-in-waiting.”
What the housing crisis means is the continued destruction of the wealth of Americans. If the housing crisis is not confronted and we do not prevent underwater mortgages from going into foreclosure, $221 billion in additional wealth will be lost. Thus, the first step towards real economic recovery is to stop foreclosures and keep people in their homes.
This May, the Home Defenders League and Occupy Our Homes held a week of actions in Washington, DC, which included an occupation of the Department of Justice, to protest the failure to prosecute the big banks and others involved in the “liar’s loans” housing market. They demanded that mortgages be written down to reflect the real value of homes, not the inflated housing bubble values. Instead of hearing their concerns, the response was dozens of them being arrested, including one woman who was tasered.
Most of their work takes place at the local level. Occupy Our Homes has protected hundreds of homes through direct resistance, re-occupying homes and pressuring and protesting banks. For example, this July in Minnesota, 75 community members with Occupy Homes MN turned back 30 sheriff’s deputies from their attempt to evict a family. Activists in Minnesota have declared communities where foreclosures are most common to be “Foreclosure and Eviction Free Zones.”
Project REconomy in Southern Oregon is working to stop foreclosures so that families do not face eviction. Founded in 2009, by people facing foreclosure, Project REconomy is a homeowner-led nonprofit with the goal of “Empowering and uniting people to reinvent an economy that works for all.”
The organizers developed a statewide network to stop foreclosures and the destruction they cause communities; built a legal network and research team, and provided education and outreach to homeowners facing foreclosure. They work in the system and have set legal precedents against the banks, stopped bank-sponsored legislation in the Oregon house, provided input in crucial policy decisions, and worked in coalition with many other groups to hold events statewide that educate communities and call them to action.
Project REconomy views the housing crisis as a foundational issue for creating an economy that supports families and builds livable communities. They are also working with the families who have remained in their homes, most of whom are small or micro-business owners, to find alternative ways to sustain their businesses, and thus, their incomes.
Cities are beginning to fight back by using their power of eminent domain to seize underwater homes threatened with foreclosure. This has been discussed in many cities, but the city of Richmond, California, has been the first to take steps to implement the program. In July, the City Council, with the support of the Alliance of Californians for Community Empowerment, voted 6-0 to make offers to buy underwater mortgages. If lenders refuse, the city will take them by eminent domain and work with a group of friendly investors (Mortgage Resolution Partners) to refinance the loans with the Federal Housing Administration.
A group of investors is also trying to mitigate the foreclosure crisis. Boston Community Capital, through its Stabilizing Urban Neighborhoods initiative, buys homes going into foreclosure. Boston Capital resells the houses to the occupants with a new 30-year, fixed-rate mortgage. The new mortgage cuts the monthly mortgage payment and loan balance by 40 percent. Boston Community Capital, a 28-year-old community development financial institution, realizes it is better to keep people in their home, put a floor under housing prices and keep the community stable. They have bought 400 homes in Massachusetts and plan to buy 75 more. Then they will expand the program to other states. Maryland may be first. They received a $25 million loan from East Boston Savings Bank this spring.
Creating Permanently Affordable Housing
Stopping foreclosures and taking on the banks are important actions. However, they maintain the same system that created the crisis. Given that housing is a basic necessity, similar to education and health care, and that homelessness has widespread ramifications, some groups have taken the approach to remove housing from the vagaries of the market and create permanently affordable housing through land trusts and housing cooperatives.
Community-Wealth.org defines a land trust as:
“a community-based, nonprofit organization that buys land on behalf of the community and holds it in trust. By taking the land out of the market and capturing the equity gain for the community, the land trust builds community wealth. Most community land trusts lease homes out to residents using a model that enables residents to gain a minority share of the equity gain, but keeping most of the gain in the trust, thereby ensuring affordability for the future members. Land trusts also serve to shield the community from both land speculators and the dislocating effects of gentrification.”
The Community Land Trust is built on a model developed in India by disciples of Gandhi. The first community land trust in the United States was formed in 1969 in Georgia by Robert Swann; Slater King, a cousin of Rev. Dr. Martin Luther King, Jr.; Charles Sherrod, an organizer for the Student Nonviolent Coordinating Committee, and individuals from other civil rights organizations in the South. The trust, New Communities, Inc., was “a nonprofit organization to hold land in perpetual trust for the permanent use of rural communities.” The goal was to achieve secure access to farm land for African-American farmers and to work the land with financial security. At 5,700 acres, New Communities was once one of the largest-acreage African American-owned properties in the United States. Swann went on to found the E.F. Schumacher Society Center for New Economics, which continues to develop community land trusts as part of its mission to develop economics for people and the planet.
Swann was inspired by disciples of Gandhi who visited villages in rural India in the 1950s and 60s to convince people with excess land to give it to poorer Indians, known as the Land Gift Movement. They succeeded but found that the new landowners had no resources to develop the land and gave the land back to the wealthy. Their next step was to put donated land into the control of the village, which would lease the land. This system, the Gramdan or Village gift system, developed into a series of regional village trusts.
There are now numerous excellent models to learn from as there are now over 200 community land trusts with approximately 10,000 housing units in the United States. Typically, the land is held in a trust that is managed by a nonprofit board of directors that represents the community. The classic board would be made up of a diverse group so all interests are heard, but no interest dominates, e.g., one-third are people who are homeowners in the land trust, one-third are the surrounding community that do not own homes in the land trust and one-third represent the public interest including nonprofits, public officials, or community groups.
The land trust gives a 99-year lease to the buyer for the land and keeps an option to buy the house back at a predetermined formula that allows the homeowner to get the down payment, principal payments and 25 percent of the accumulated equity. The trust keeps the remaining equity, which allows it to re-sell the property at a below-market price, creating a barrier to gentrification and a tool to build wealth in low-income communities. This is good for the homeowner, who can buy a home more cheaply and still make a profit, good for creating a stable community and good for keeping home prices low for future generations.
Another model is cooperative housing. Housing cooperatives are not a new idea; the first housing cooperative in the nation was organized in New York City in the late 1800s. According to the National Association of Housing Cooperatives, 1.2 million families live in cooperative housing. Housing cooperatives include a wide variety of different types of homes, such as townhouses, garden apartments, mid- and high-rise apartments, single-family homes, student housing, senior housing, and mobile home parks.
A housing cooperative is created by people coming together on a democratic basis to own housing. Usually a nonprofit is formed to manage the cooperative and people pay each month to cover the operating expenses. Members of the cooperative each own a share in the corporation that owns the property in which they live. Each shareholder is entitled to occupy a specific unit and has a vote in the corporation. A key aspect in any cooperative is democratic control by the members; usually that requires the election of a board of directors, creation of committees or, in smaller cooperatives, decision-making by the group.
The benefits of a cooperative, in addition to having a voice in the control of one’s residential property, are personal income tax deductions, lower turnover rates, lower real estate tax assessments, controlled maintenance costs, and resident participation and control. Another key element is that the members, through their elected representatives, screen and select who may live in the cooperative.
Real Economic Recovery Will Come From the People
Housing is not only a foundation to our economy but it is also a foundation for fulfilled and successful lives. The crisis of homelessness, which is being made worse by the housing collapse and foreclosure crisis, along with the racial disparity in housing and the insecurity many people have in keeping their homes from being foreclosed or their family being evicted, create a crisis in the lives of many in the US.
It is clear that the big banks and investment institutions do not have the interests of the people in mind. And government has refused to take appropriate steps to protect people from or even prosecute blatantly fraudulent behavior by big finance.
As with so many other areas of change, it is up to the people to create real economic recovery, not simply more profits for the wealthy. The foundation of this recovery is to guarantee that all people have access to shelter.
The two-track approach we advocate as “Stop the Machine, Create a New World” for shifting power to the people is described above. It includes stopping fraud through protest and the legal and legislative systems and building housing institutions based on the principles we value such as equality, cooperation and participatory democracy.
You can hear Margaret Flowers and Kevin Zeese interview, Solutions to the Housing Crisis with Michael Carlson and Nancie Koerber, on Clearing the FOG.