Since the onset of the Great Foreclosure Adventure launched by banks and mortgage companies in 2007 causing the housing market collapse, the financial industry has done a great job of screwing the homeless twice, and without any foreplay or even a kiss.
First they got hapless borrowers into shady mortgages with hidden fees and ballooning payments when they were buying their home. When the borrower defaulted on the loan because they couldn’t keep up with soaring interest rates, hidden fees and ballooning payment, the bank would toss them out onto the street. Now, banks are screwing folks a second time because they won’t or can’t donate the property to non-profit groups or charities that could make necessary repairs and then give the house to somebody who doesn’t have one.
America was left with an unprecedented number of abandoned homes, leading to neighborhood deterioration not seen on such a large scale since the inner-city riots that flared through the US in the late 1960s. As a result, countless houses fell into decay: They were vandalized, taken over by crackheads and dealers, or generally allowed to rot. In many cities, entire neighborhoods collapsed because even just one abandoned house on a street affects the value of an entire block. The mortgage holder’s asset turned into a liability and then disappeared entirely as cities moved in to tear down structures.
Yet many empty homes still are structurally sound and in decent enough shape that, with a bit of rehabbing, fresh paint and some TLC, they could be lived in again. In fact, they would make wonderful places for some of the millions of homeless people – especially homeless families – to live.
So why isn’t it happening?
Habitat For Nobody
It would seem to be a no-brainer: A bank with a foreclosed house that is standing empty, and that it cannot or will not sell in a soft market, could donate the property to an organization such as Habitat For Humanity that could repair the structure before handing the keys over to a homeless family.
Here’s the problem: Often, banks aren’t really certain that it actually owns the property it seized.
Part of what caused the Lesser Depression to become so severe in 2008 was the chicanery of “securitized mortgages.” A Wells Fargo would sell its mortgages to a third party, someone like Goldman Sachs. Goldman then sliced, diced and repackaged hundreds of mortgages from numerous lenders to create a new vehicle to sell. Bits of the new instrument were sold off piecemeal to investors ranging from pension funds and large investors to other dealers – many of whom did another round of slicing and dicing before reselling its own bundle.
By the time everyone was done buying and selling slivers of a mortgage investment instrument, no one quite knew exactly what they owned of the tiny, individual pieces.
“We haven’t a clue what we really own,” an executive at a major bank confides, requesting anonymity because she is not authorized to speak with reporters. “How can we sell, let alone donate, something that might not be ours?”
“If they aren’t sure they owned our house, then how did they foreclose on us?” Richard Nymann demands to know. He and his family lived on Long Island in a four bedroom house with a big yard until late 2009, when the bank servicing their mortgage tossed them out on the street. They moved from one relative’s house to another before he found a new job and was able to rent a two bedroom townhouse.
Nymann isn’t alone in asking the question. In fact, the problem is so widespread that at least four major banks including Bank of America, JPMorganChase, Ally Financial – it used to be called GMAC – and PNC Financial called a temporary halt to foreclosures simply to figure out who owns a clear title to specific properties.
“Judges were lecturing us because we couldn’t prove our client actually had an interest in the property,” a lawyer whose firm does a lot of work for banks sputtered. “They’d throw out the case and we had to start over.”
It’s possible to turn empty homes into places to live. It requires the involvement of municipal governments and they have the legal authority to step in and rescue empty and abandoned houses.
The power to do so is rooted in what is called “eminent domain” and governments use it frequently to take over private property for everything from road construction and schools to power lines and even private development. The International Economic Development Council says eminent domain should be used when government needs “to assemble underutilized land or land in decaying or depressed neighborhoods and revitalize communities and cities.”
In 2005, the U.S. Supreme Court said New London, Connecticut could use the procedure to seize privately-owned property so developers could build a new shopping mall. The court expanded the definition of eminent domain to include seizures where someone might turn a profit. The precedent means there’s no reason why a city could not do the same thing to take over empty or abandoned houses and make them available to homeless families or individuals.
Here’s how it’d work, sparing all of the legalese details.
A home has been standing empty since The First National Bank of Greed foreclosed on its previous owners. The city uses eminent domain to seize the property because it’s in the city’s interest to repair the place and make it livable for a homeless family. This stabilizes the value of all homes on the street, increasing property tax revenue and reducing the cost of taking care of a homeless family. The town offers “fair market value” to First Greed for the property.
Ah, but what is fair value? The bank wants $300,000 because that’s the outstanding mortgage. The city notes there are two other abandoned houses on the block, and similar occupied homes listed for sale at $100,000 aren’t being bought.
The value is determined the same way as in any eminent domain proceeding when two sides can’t agree: The average of three appraisals, which could be in the $75,000 range.
Funding the plan could be just as creative. For argument’s sake, assume that there are $50-million worth of foreclosed houses in a city. The municipality sells $50-million of 30-year tax-free bonds to investors. When a homeless person or family moves in, they pay the city rent equal to what it has to pay every month to meet its debt obligation. As part of the deal, the municipality could declare a property tax holiday on the property for five years – precisely what governments do all the time for businesses.
With money so cheap right now, and assuming that it doesn’t get ripped off by a Wall Street bid-rigging scandal involving a municipal bond underwriting the way Oakland California and a host of other cities have, the town would pay interest of 3% or less.
Indeed, two California cities are planning to do something just like this. Ontario and Fontana, located in San Bernadino County just east of Los Angeles, are determined to “using eminent domain to buy up mortgages for homes that are underwater,” according to The New York Times.
Rolling Stone’s Matt Taibbi calls this the death star option available to cities, noting that using eminent domain “to seize toxic debt might be the one structural flaw big enough …” to force banks into acting like rational corporate citizens.
Acquanetta Warren, mayor of the city of Fontana, told The New York Times “Sooner or later all these people who are upside down on their homes are just going to leave the keys out on the door and say forget it. This was supposed to be the promised land, and now we have people waiting in some kind of hellish purgatory.”
San Bernardino County has set up the mechanism needed to condemn and seize home loans, with some details still being worked out. Roughly 20,000 homeowners would be eligible for the program.
The plan is being fronted by Mortgage Resolution Partners, run by venture capitalist Steven Gluckstern. He told Taibbi, “A bunch of us … asked ourselves what a fix of the foreclosure problem would look like. Then we asked, is there a way to fix it and make money, too. I mean, we’re businessmen.”
There’s nothing wrong with someone making money, especially if it can help underwater homeowners and people who have no home at all.
Not surprising, bankers have their panties all in a bunch over the idea.
The Securities Industry and Financial Markets Assn. (SIFMA) is playing dirty. In a policy statement, SIFMA says its members will not make new home loans in counties that use eminent domain. In other words, SIFMA is promising to make it difficult for any community that tries this tactic to obtain private mortgage financing in the future.
SIFMA insists that saving homeowners and the homeless is “illegal and unconstitutional.”
Apparently, lawyers toiling for SIFMA and Wall Street haven’t read Kelo v. New London. They ought to, maybe this weekend. Kelo is the magic key to the kingdom given to cities by the Supreme Court to solve a massive problem. And, anyway, it’s nice to watch bankster’s fretting over what they see as being screwed the way they screwed America. And we won’t even have to give them a kiss.
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Charley’s next book is about his experience being homeless. When published, he will donate a percentage of his royalties to homeless organizations.