Richmond, CA – In a run-down shopping center in the heart of this San Francisco Bay Area community, about a half dozen activists are plotting to turn the housing market on its head.
Their aim: stem home mortgage foreclosures and preserve neighborhoods in a city hit hard by the housing bust. But, this time, the activists have some unusual allies.
They have enlisted officials from the city of Richmond and beyond. They’re working alongside a group of investors who stand to make a profit if the plan works. And they’re advocating government seizures.
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Wait - seizing private property? Profiting from neighborhood preservation? Is this the Bizarro World? Well, sort of. But the way the activists see it, they’ve hit upon an idea that’s so counterintuitive, it just might work.
That idea involves eminent domain, the power of government to take private property for public purposes. It’s generally used to obtain land for civic projects such as highway expansion and public utility rights-of-way. Often, the targeted properties are in poor neighborhoods, and residents get pushed out of their homes because the “public good” trumps property rights.
But, recently, some academics hit on another application: government seizure of underwater mortgages to help struggling homeowners. Through a series of quick transactions, supporters say, such seizures would allow homeowners to reduce their payments and avoid foreclosure.
Supporters believe the approach could ultimately help millions of families and shore up economically-fragile cities. It’s already being discussed across the country, in Oakland, Minneapolis, Seattle and Newark, N.J.
“After years of waiting on banks and government, we finally have a strategy,” said Amy Schur, who is helping lead the activists’ campaign. She said in 25 years of community organizing, it’s the most exciting project she’s ever worked on. “We now have something that’s terrifying them.”
By “them,” Schur means Wall Street.
The financial industry is taking the threat seriously. Its leaders are likening the plan to outright theft, and have descended on the hard-scrabble city of Richmond, filing a federal lawsuit and ramping up political pressure. Some members of Congress are trying to stop these efforts, and federal housing agencies have weighed in as well.
“If there ever was a David versus Goliath fight,” Schur said, “this is it.”
There’s big money at stake here, and big ideas. But even the plan’s chief salesman, a wealthy progressive who stands to make a tidy profit if it’s successful, learned the hard way that people, not money, are the key to winning this battle.
The Big Idea
Steven Gluckstern, makes no excuses: He’s part of the 1 percent. But he fashions himself an “accidental rich person,” a San Francisco resident who started out as a school teacher before making his fortune on Wall Street. He was the founding chair of the Democracy Alliance, a group of wealthy progressive donors. Now, he’s pushing the eminent domain idea through a new company, Mortgage Resolution Partners (MRP).
Like everybody, he saw the housing market collapse. And although the country is now in the midst of a slow economic recovery, he knows that many communities, like Richmond, are still struggling.
Currently, about 11 million homeowners are underwater – that is, the market value of their homes is less than what they owe on their mortgage.
Foreclosures don’t hit the Glucksterns of the world. They hit the lower-income couple who was sold a predatory loan. Or the mom who spent time on unemployment during the Great Recession. These foreclosures hurt not only the families, but often send neighborhoods into a kind of death spiral.
They hit people like Adolfo Senior, a registered nurse from Jamaica who has a wife and two kids.
“I wanted to live the American dream,” he explained of his decision, in 2004, to buy a home. His house is now assessed at $265,000, but he has a mortgage of $465,000 with an adjustable interest rate – and he has lost one of his two jobs.
“I’m just barely meeting the basic needs right now,” he said. When the interest rate rises and bumps up his monthly payment, Senior noted, “I’m really going to be washed away.”
There are programs to help, but most don’t address the problem of being so deeply underwater. Statistically, those mortgages are far more likely to go into foreclosure. Experts say millions more foreclosures are on the horizon.
Some say the only solution is principal reduction: that is, reducing the mortgage amount to the home’s current value and forgiving the rest. The banks and investors that hold the mortgages, however, would rather continue collecting on the original big loan, though that sometimes risks foreclosure.
A few years ago, Gluckstern learned about principal reduction through eminent domain. The idea is that government has the power to force mortgage holders to sell the loan if it’s for the public good. Cities would buy the underwater mortgages, getting them at a discount because the house’s value has declined so much and because the risk of default is high. (A court would determine the fair value.) The homeowner would no longer be underwater and would pay off the city with a new mortgage.
Richmond wouldn’t use tax dollars for this. Gluckstern has lined up investors who would be able bankroll it. He says his motive is to prevent foreclosures. But the investors would earn a return, and MRP would earn $4,500 for each mortgage acquired.
MRP is focusing on specific mortgages that have been bundled together as private-label securities. That’s key. These include the loans made willy-nilly during the housing boom years, sometimes at high rates, sometimes to people who probably shouldn’t have qualified. Now, those loans are the most likely to default.
They’re also publicly traded, which means they are priced by market forces and are now worth less than their original face value. That’s reflected in the investors’ balance sheet, Gluckstern said.
“The loss has already been absorbed by the marketplace,” he explained. “Except, we never relieve the homeowner of that difference.”
It all seemed logical to him. So, he was surprised when he had trouble getting traction. “We were getting beat up,” he recalled.
Then he met Amy Schur.
Schur, the campaign director for Alliance of Californians for Community Empowerment (ACCE), a nonprofit social justice group, came as a skeptic. “Eminent domain? Sounds sketchy,” she thought.
“Then we heard it was about principal reduction and that Wall Street really hated it,” Schur recalled. “We thought, ‘This looks interesting.’”
Before getting behind the idea, however, Schur told Gluckstern exactly what she thought. As he recalled it, “She said, ‘You guys don’t know what you’re doing.’”
MRP had used a “top down” strategy, focusing on government officials. What this effort needed was a groundswell of public support to get the politicians to commit. Grassroots work was Schur’s bailiwick. Last spring, Gluckstern and Schur essentially switched places.
ACCE began taking the lead and they focused on Richmond.
Within months, Gluckstern began to realize something. “It’s gotten to be a movement.”
Finding Community Support
To be sure, there are some very nice homes in Richmond, including million-dollar properties overlooking the San Francisco Bay. And property values are gradually increasing, albeit more slowly than in surrounding communities.
But the majority of the city is working class. On city streets, there are empty storefronts. Before the crash, the median home price was about $400,000; now, it’s half that. That’s left residential areas pockmarked by foreclosures – about 2,000 in three years. Drive around and you realize it takes only one boarded up home to cast a pall on a block.
“Families get foreclosure notices, and they leave,” explained Eva Mann, a Richmond code enforcement officer. Some banks, however, aren’t quick to act, and some of the homes sit empty for years. Abandoned homes attract crime and delinquency and bring down property values. Vagrants break down the walls to get at the pipes and wiring, which they can sell. All of this costs the city money. Meanwhile, property tax revenues have dropped substantially.
On a recent afternoon, Mann was stopped by a neighbor as she left one such property.
“You going to do something about this?” the woman asked, pointing at the house. A few years earlier, the house had caught fire, which left a hole in the roof. Rain has been falling into the house since.
“We come out here, we board it up, and what do we have now?” said Tim Higares, Mann’s supervisor at the city of Richmond. “Blight. The neighborhood is the victim.”
Last spring, Schur and her group went door to door armed with lists of underwater homes and quickly found support among people like Robert and Patty Castillo.
The couple has two children, one of whom, Leon, now 24, has severe autism and needs 24-hour supervision. Leon is part of the reason the Castillos decided to buy a home. Leon had a tendency to smash things, and that didn’t sit well with landlords. In 2005, they bought a modest three-bedroom house for $420,000.
The crash sent the home’s value plummeting by some $300,000. The Castillos are making their mortgage payments, but when the interest rate increases, they don’t know if they’ll be able to keep up.
“It just doesn’t seem fair,” Robert, a school bus mechanic, said.
One day, someone from ACCE left a flier at the Castillos’ house about an upcoming community meeting. There, they found hope.
“It really helped me to see that I wasn’t in this situation by myself,” Robert Castillo said.
Family by family, the principal reduction idea has caught fire in Richmond. Finally, struggling homeowners felt like they had some power.
“It was exhilarating for people,” Schur said. “This was not the city laying out a program. It was run by community leaders.”
Meanwhile, the city agreed to work with MRP. In July 2013, it took a big step, sending letters to the mortgage holders on 624 distressed properties asking them to sell the loans to the city. The letters were intended as a starting point for negotiations but also noted that the city could use its power of eminent domain to force the lenders to sell.
Not a single one took up the offer.
Drying Up Lending?
By that time, Wall Street had begun lobbying in Richmond and beyond. Other groups sprung up in opposition, too, including the local association of Realtors, which believes purchasing the underwater mortgages through eminent domain would hurt, not help, property values.
Jeffrey Wright, a Richmond Realtor, has several issues with the eminent domain idea. First, he said, the market in Richmond is not as bleak as has been portrayed and is actually on an upswing.
“Logic says if [the homeowners] managed to hold on during the worst of times, they can continue to hold on,” he said.
Wright also thinks the approach engenders false hope because only a select few homeowners would qualify. His biggest concern, however, is how lenders will react. If they think their mortgages can be taken at the city’s whim, he’s convinced, they won’t continue to make loans in Richmond.
In fact, the Federal Housing Finance Agency has issued a notice saying it has “serious concerns” about the plan and could decide to direct U.S. mortgage giants to “cease business activities” in Richmond. That would dry up lending.
Opponents of the city’s eminent domain plan began their own ground campaign, including printing up T-shirts, putting up a website (stopinvestorgreed.com) and mailing out literature. They positioned MRP as the bad guy - yet another arm of big, bad Wall Street.
“Wall Street bankers and MRP have sold the city council on a plan that will make them millions,” one glossy flier said. “But it will sink Richmond home prices, drown our city in debt and leave us awash in legal bills. Don’t let Wall Street get rich off Richmond AGAIN!”
In August, several major financial institutions filed a lawsuit arguing the plan was unconstitutional. They estimate the city would acquire each mortgage for $100,000 to $200,000 less than its face value, which would hurt not only the financial institutions but the people whose pension funds have been invested in mortgage-backed securities.
The plan is a “brazen scheme to abuse government powers for [MRP’s] own profit,” one of the industry lawyers was quoted as saying.
The lawsuit was dismissed as premature, but the banks have appealed.
Richmond Makes a Move
Richmond’s “offer letters” were the first of their kind in the country. That makes the city a leading test case, but Richmond city government is still a long way from seizing mortgages under eminent domain. City manager Lindsay said he wants to negotiate.
“This isn’t about going after the banks,” he said. “This is about neighborhood preservation.”
If negotiation fails and the city pursues eminent domain, each mortgage seizure would require not only court approval, but also a supermajority of the City Council, which at the moment supporters do not have.
By now, the idea has reached beyond Richmond to cities across the country. The mortgage industry views the plan as “a virus,” Gluckstern said. “They have to stop it from succeeding anywhere.
“We,” on the other hand, “just need to win one lawsuit.”
Then, he believes, they’ll start to negotiate.