Eminent Domain for Mortgages
On January 12, Commonwealth Magazine (Boston) released an article discussing the idea of using a municipality's powers of eminent domain to aid homeowners facing foreclosure.
Eminent domain for mortgages
Brockton, other cities consider novel idea
ON THE MORNING OF SEPTEMBER 28, Brockton police arrested 51-year old Tyrone Hubbard and his two sons for trespassing in their own home. Fannie Mae, the federally chartered purchaser of mortgages, was foreclosing on Hubbard’s house and wanted him out. Trying in vain to make peace was City Councilor Jass Stewart, who had arrived to support 20 or so demonstrators staging an eviction blockade. The protest sputtered, the eviction was carried out, and the house remains vacant today. But the grim scene—another brutal foreclosure, cops pitted against residents, and a boarded-up home—galvanized Stewart. Rather than let the banks seize homes, he thought, what if the city did it first?
Stewart is now exploring a new, controversial plan that would have Brockton buy up the mortgages of underwater homeowners—those who owe more on their loans than their homes are worth—using its power of eminent domain. As currently envisioned, the city would pay the original lender “fair compensation” for the mortgage based on the current value of the home rather than what the homeowner paid for it before the crash. The city would then tear up the old mortgage, allowing the homeowner to refinance with a new lender. From there, the owner could stay in his home, making monthly payments in line with its actual value, and the neighborhood would remain stable.
It would be a novel use of government’s sweeping eminent domain powers, which are generally reserved for land-takings to build new roads, schools, libraries, or other projects with a clear public purpose. But those behind the proposal make the case that eminent domain takings of mortgages serve an indisputable common good, that there’s no better way to boost a local economy than by preventing foreclosures and getting homeowners out of debt.
The idea comes from Mortgage Resolution Partners, a group of San Francisco-based entrepreneurs who have agreed to front the money for the city’s eminent domain takings through a group of investors they’ve already lined up. The investors would get their cash back when the new mortgage lenders pay the city for the rights to refinance a homeowner’s new, fairer loan. MRP, in turn, would collect a $4,500 fee on each sale. In order for the plan to work, the city would have to collect enough money from the new mortgage lender to cover the cost of the eminent domain taking plus the $4,500 it owes MRP.
The scheme has never been tested, so it’s un¬clear how smoothly it would work from a legal and financial sense. Yet the proposal is attracting enormous attention around the country at a time when communities are struggling to cope with underwater mortgages.
Compared to Nevada, or even Rhode Island, Massachusetts escaped pretty much unscathed from the 2008 housing crash. But parts of the state, in¬cluding Brockton and other hardscrabble communities such as Lawrence and East Boston, did not (“Broken homes,” CW, Winter 2009). Since 2008, Brockton has experienced more foreclosures than any other city in the state. Vacant properties have begotten more vacant properties. The values of entire neighborhoods have steadily diminished, paralyzing the local economy.
“When you have such a large amount of un¬employed people, you have people breaking into houses” to stay warm, or to steal scrap metal and floorboards, says Robert Jenkins, director of housing at the Brockton Redevelopment Authority. And those who still own their homes? “We have people working three or four jobs to make their payments. In Brockton, if you [just] have those two incomes, or one, you can’t make the payments.”
Still, many of those struggling homeowners owe more than their homes are worth, putting them at high risk of foreclosure. Forty-seven percent of Brockton’s 16,537 mortgages are underwater, far above the statewide average of 16 percent, according to data provided by The Warren Group.
It’s not for lack of trying that Brockton finds itself in this predicament. In 2008, a group of local banks started voluntarily lending to homeowners at below-market interest rates. In 2011, one non-profit, Boston Com¬munity Capital, began buying up Brockton homes facing foreclosure and selling them back to their owners at a discount. Through the $26 million HomeCorps program, created this year using funds from Attorney General Martha Coakley’s blockbuster 2011 national mortgage abuse settlement, Brockton has begun seizing abandoned homes, sprucing them up, and selling them for cheap to first-time homebuyers.
But one large group of homeowners—perhaps the group that’s weighing Brockton’s economy down the most—can’t get much direct help from any of these programs. “I don’t know if there’s anything that addresses underwater loans in the city,” says Stewart, the city councilor. Plenty of resources have been directed at homeowners facing foreclosure, and those who are above water on their loans. But little or no money has been directed to those in between. That’s where eminent domain—the public authority to seize private property—comes in.
The idea got its start in 2008, when Harvard Law School professor Howell Jackson began arguing that the federal government was legally authorized (and, to some extent, morally obligated) to seize underwater mortgages through the bank bailout, known formally as the Troubled Asset Relief Program. Instead of bailing out banks for losing money on all the bad mortgages they financed, he figured, why not bail out those who held the mortgages themselves, many of whom were victims of predatory lending.
Jackson was inspired by the Home Owners Loan Cor¬p¬oration (HOLC), a 1933 New Deal program that bought up 1 million mortgages en masse and sold them back to their owners for cheap. By averting “the threatened collapse of the real estate market,” wrote historian Arthur Schles¬inger Jr., “no single measure consolidated so much middle-class support for the [Roosevelt] Administration.”
The Obama administration didn’t embrace Jackson’s idea. Despite repeated calls for a new, eminent domain-driven HOLC 2.0, most vociferously from US Rep. Brad Miller of North Carolina, the proposal went nowhere. Federal Housing Finance Agency chief Edward DeMarco also opposes any sort of principal reduction on federally-backed loans.
But by 2011, a new take on the proposal was brewing. If the feds weren’t going to do anything, what if municipalities acted instead? A big hurdle was funding. While Jackson’s plan would have drawn its financing from $700 billion in TARP money, most cities and towns don’t have the money to buy up mortgages using eminent domain, which requires “fair compensation.”
Mortgage Resolution Partners, created in June 2011 by a group of businessmen and venture capitalists, stepped up to the plate, offering funding for the eminent domain takings. Last June, after convincing California’s San Bernardino County to create a special legal body to collect mortgages, MRP got its first surge of national attention, earning high praise both from center-left pragmatists like the New York Times’s Joe Nocera (“Nothing has yet worked to stem the terrible tide of foreclosures. It’s time to give eminent domain a try”) and raving liberals like Rolling Stone’s Matt Taibbi (“This story has the potential to be the first true open, pitched battle between Wall Street and the homeowners and communities who have been the primary victims of financial corruption”).
Mortgage Resolution Partners founder and CEO Steven Gluckstern says he’s in contact with officials in about 10 areas nationwide, including Chicago and Suffolk County, Long Island, but was cagey about details: He’s worried cities outed in public will get pressured by the financial industry to abandon ship. At the risk of jeopardizing Brockton’s plans, Gluckstern and a top aide first met with Stewart, the city councilor from Brockton, in early December.
Not surprisingly, the Mortgage Bankers Association, and several dozen other industry groups, have come out against eminent domain takings of mortgages. The takings would force lenders to admit they had lost money on their original mortgages. Mortgage bankers also claim the plan would distort credit markets and crowd out future investors. As to the question of whether the eminent domain taking of a mortgage is unconstitutional—another common charge—David Reiss, a professor at Brooklyn School of Law, has pointed to a 1935 case in which the Supreme Court itself floated the idea of mortgage relief through eminent domain.
MRP has also received criticism from the left, as some have questioned the group’s profit motive. (MRP is headed by veterans of General Electric, Bank of America, and Berkshire Hathaway.) Facing criticism from Reuters financial blogger Felix Salmon and American Prospect co-founder Robert Kuttner, among others, MRP backed down from its original plan to only help underwater homeowners still current on their mortgage payments, while excluding truly desperate borrowers who had stopped paying.
Still, while many early advocates of eminent domain mortgage relief think MRP’s plan is imperfect, they also think it’s better than nothing. Jackson still prefers his TARP proposal, but acknowledges the eminent domain approach is more politically feasible. “With a new Demo¬cratic administration coming in,” Jackson says of his 2008 effort, “I totally understand why it didn’t work politically.” Julia Gordon, director of housing finance and policy for the Center for American Progress, a liberal-leaning Wash¬ington think tank, says that while it makes her “uncomfortable” that MRP would make money from the proposal, she concedes that “when it comes to the general principle, my feeling is that’s what eminent domain is for.”
Ultimately, the strongest opposition to the plan may come from within Brockton itself. Robert Jenkins, the Brockton Redevelopment Authority housing director, says he’s scared the plan will backfire, and bury the city in legal fees. He was so down on the idea that he denied knowing about any efforts within Brockton to make it happen; Stewart says they talked it over just days earlier.
Brockton Mayor Linda Balzotti is worried about the cost. “We’re obviously a cash-strapped community,” she says. “I’m not sure we want to get into the business of buying properties and then selling them off. I’m not sure if I want to get into the real estate business.”
Even Stewart, who’s championing the plan, is at odds with one particular aspect of MRP’s terms. The group wants to get maximum “bang for the buck” by targeting only those “private-label” loans that are held by complicated trusts, while ignoring federally-backed or bank-owned mortgages. Banks are more likely to refinance on their own, while the federal government isn’t worth messing with, MRP argues. That said, the private-label mortgages (think Countrywide) only comprise about 10 percent of the market, which would exclude the vast majority of Stewart’s constituents.
But Stewart, who at press time was planning to hold his first public meeting on the idea with MRP and Harvard Legal Aid Bureau, is cautiously optimistic. “Any time you mention eminent domain people feel a little nervous,” he says. But the more he talks about it with his colleagues, “through little side conversations” whenever he can, the more he senses they’re warming to the idea. “If you’re talking about putting the city and its residents in the driver’s seat, this is the only way to do it,” he says.
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