By Hannah Appel and JP Massar – Strike Debt Bay Area
More than ten million foreclosures have piled up nationwide since the beginning of the mortgage crisis (Silver-Greenberg), forcing untold millions of people out of their homes. Egregious but all-too-common corporate practices contributed to the disaster: robo-signed or plainly fraudulent paperwork; borrowers with prime credit scores receiving subprime loans based on race. A series of government “settlements” benefitted too-big-to-fail banks far more than struggling homeowners. As people lost jobs and struggled to stay in their homes, multiple forms of debt began to intersect, leaving many to choose between mortgage payments and medical bills, groceries, or student loan installments.
A few hundred homes out of millions have been saved with direct action. Groups like Occupy Oakland Foreclosure Defense have focused their efforts on individual homeowners with tragic stories like that of Jodie Randolph in Alameda, CA, who was being forced to choose between chemotherapy and a roof over her head. Others have pursued lawsuits with lackluster results. Government programs and monies from “settlements” with the big banks have only reached a small percentage of those affected, and even then it is often too little, too late. In other words, we’ve barely made a dent. We need a more radical solution.
Enter Richmond, California, a small city of roughly a hundred thousand people (39% Latino, 31% white, 26% African American.) Richmond has been hit particularly hard by the foreclosure crisis and recently decided to do something about it. In late July of 2013, the city approached banks and other holders of 624 underwater properties, offering to buy the mortgages at fair market value in order to refinance them and give residents substantial principal reductions (see Appendix II). Not a single mortgage holder responded. Richmond then decided to explore the option of seizing the mortgages through eminent domain.
The 1% has other ideas.
In response to the whisper of eminent domain, Wells Fargo and Deutsche Bank filed a lawsuit[i] demanding an injunction forbidding Richmond from continuing this process; analysts predicted that banks would never write a mortgage in Richmond again, and Wall Street managed to blackball the city to such an extent that no one was willing to buy a standard, vanilla municipal bond offering they floated in August, 2013. Ratings agencies also threatened to downgrade Richmond’s A- credit rating.
No one seems to bat an eye when eminent domain is used to seize land in the name of “economic development,” but where it’s being used to directly improve the economic well-being of homeowners and the city at large Wall Street unleashes its wrath.
Swayed by the intense pressure, Richmond’s city council now seems divided on how to proceed – but Richmond’s citizens seem more united. At a September 2013 meeting, one councilmember opposed to the plan asked the packed crowd, “Do you really want a tiny city like Richmond to take on Wall Street?” “YES!” was the uproarious response. While the banks’ initial lawsuit was dismissed (but can still be re-filed), there is no doubt that Wall Street and the Obama administration will continue to pressure Richmond to drop the plan. (The Federal Housing Finance Agency has all but threatened to file suit itself).
Why is Wall Street so frightened? After all, investors would be paid fair market value for the mortgages they are holding. Indeed, the original version of the plan, written by Professor Richard Hockett of Cornell University, posed it not as radical but as a “market corrective.” Hockett designed the plan as a win for creditors as well as homeowners, a method to bring the market back in a way that returns steady, predictable profits to investors and helps communities fund their operations by recuperating the local tax base. So again, if the plan’s original architect had such conservative intentions (at least to radical ears), why the hullabaloo? And why might those of us interested in more radical approaches to systemic debt support this particular plan? Here are a few thoughts:
- In most cases banks don’t actually own these mortgages. Mortgages were and continue to be repackaged into securities by banks and then sold in tranches to investors across the world. What banks do is service these mortgages. They get paid fees for collecting mortgage payments; they get paid fees for dealing with homeowners questions and refinance requests; if a home goes into foreclosure, they get paid to handle all the foreclosure proceedings and a fee to handle an eviction if necessary. Were the Richmond plan to go through, many banks would no longer act as servicers and would thus lose that revenue stream.
- In some cases, investor holdings of mortgage securities may be on their books at still-inflated rates rather than at current market value. In other words, the mortgage-backed securities may be priced based on the original principal amount and current revenue stream (optimistically forecasting the probability of default as small) rather than on what someone would pay for the security at the present time. Were the Richmond plan to go through, these holdings would be “marked to market” and pension funds, hedge funds and other entities which hold these securities would find themselves with less on their books than they had previously been able to claim.
- The Federal government has so far forbidden Fannie Mae and Freddie Mac from allowing principal reductions. This has set a national precedent putting principal reductions outside the realm of possibility. If Richmond were to set a new precedent, no one knows what effect it might have on the mortgage securities market. Financial markets, of course, are a confidence scheme, based as much (if not more) on trust, perception and affect than on quantitative modeling or microeconomic theorems. If it is shown that a single municipality can take on Wall Street successfully and possibly spread its ideas across the country, the mortgage securities market could collapse.
- Risk is always calculated into any investment scheme and becomes a major factor in price. The concept of seizing mortgages, something previously unheard of, introduces risk of an entirely new nature and might radically change the calculus of investing in mortgage securities.
- Finally, the mortgage market has been the exclusive province of bankers, and there is no way they will cede power over this lucrative business to the public without a fight.
These are just five reasons why Wall Street might be scared, though there are likely many more we haven’t thought of. Generally, it’s a fair bet that you’re onto something when both big banks and big government want to sue you. We sense that there may be more profound reasons for their fear—ways in which the ongoing mortgage crisis makes vulnerable the very infrastructures of capitalism. For instance, hundreds of thousands of mortgages have broken chains of title (as just one example, we cite Your Mortgage Documents Are Fake), which means no one knows who, if anyone, owns them. Despite pathetic “settlements” trying to wish this reality away, these broken chains throw the nature of private property across the country into question in an unprecedented way. If Richmond and other municipalities are emboldened by a win with eminent domain, more radical agendas then seem increasingly possible—simply taking mortgages that no one can prove ownership of and using the capital to start a public bank, or redistributing those homes to their owners with clear title and no mortgage.
The Richmond situation presents ethical quandaries for the radical imagination. In order to come this far, and to continue, Richmond has relied on the pro bono services of a for-profit firm, Mortgage Resolution Partners (MRP). They are currently covering all of Richmond’s legal fees, offering technical assistance and, theoretically, providing access to the mortgage securities markets. Should mortgages ultimately be taken by eminent domain and restructured, MRP stands to gain $4,500 per mortgage (a relative pittance, considering all the resources they have and will have expended). For MRP, Richmond is clearly a loss leader; to make a profit, they would almost certainly have to take this program statewide or nationwide.
At this time we take no position on MRP’s role other than to note that without its existence and its promise to cover costs, Richmond would never have embarked on this battle. We do observe that much of MRP’s role could be played by a local or state public bank, a non-profit institution that has as an existence proof the Public Bank of North Dakota.
Richmond’s next step will be to create a Joint Powers Authority, which will allow Richmond to work with other willing municipalities in California on this project. The wider the participation, the less the risk to any single municipality, and the more Wall Street will tremble. And yet, this fight has just begun. If Richmond’s Mayor decides she has no choice but to go the eminent domain route, she will need a fifth, supermajority-giving vote from her fellow councilmembers, as necessitated by California law. Even if she gets that vote, there is a series of complicated legal issues that may affect the strategy in court. (For instance, Richmond may have the right to seize things within its borders, but does a mortgage—held by a set of investors around the globe— actually exist “within” Richmond? Does it matter?) Finally, even clearing the legal hurdles, this particular iteration of the eminent domain plan only helps a certain subset of debt-owners: those whose homes are underwater, but who are not yet in foreclosure. In other words, this is not yet the radical, systemic solution we envision and toward which we will work tirelessly. It is, however, people taking power back from Wall Street in imaginative ways, and may serve as a kind of radical calisthenics, getting us in shape for the bigger fights to come.
Appendix I: If you think this is a good idea, here’s what you can do to help:
1) Spread the word! You never know who might pick up on the idea and try to implement it.
2) If you live in California, try getting your city or town to consider the idea and join the Joint Powers Authority (Patrick Lynch, Director of Richmond’s Housing and Community Development Division). Or attempt to get your city council to issue a letter in support of Richmond’s efforts to fight foreclosures in this novel fashion.
3) If you are not in California, check to see if your state allows intangible property seizures by eminent domain. If so, suggest the process to a municipality in your state that is drowning in foreclosures.
4) Consider getting a group together to research mortgages with broken chains of title in your area. A big push here could yield radical results.
Appendix II: An example of how eminent domain principal reduction might work:
Suppose John and Mary Smith own a house on which the outstanding mortgage balance is $400,000. Suppose that if the house were sold today, its fair market value would be $200,000.
Suppose someone offered to sell the Smith’s mortgage to you (i.e.,transfer to you the right to the monthly payments and to foreclose if payments stopped). How much would you be willing to pay?
We can assume that Wall Street analysts have sophisticated computer programs that can accurately estimate how much any mortgage is worth. Suppose the value of the Smiths’ mortgage via this analysis is $180,000.
What Richmond wants to do is go to the mortgage holder and say, “Look, I know that if you offered this mortgage for sale on one of your fancy mortgage trading markets, someone might be willing to pay you $180,000 for it. Here’s $180,000. Give us the mortgage.”
A rational mortgage holder would then say, “Well, I don’t know. How about $190,000?” And then Richmond might say, “$185,000.” And the current mortgage holder would likely say, “Okay, done!”
Richmond, now the owner of this mortgage, would then turn around and give the Smiths a new mortgage with a principal amount of $200,000 (the current market value). At this point the Smiths’ home is no longer underwater, the Smiths’ monthly payment drops significantly, their chance of being forced into default has been massively reduced, there is no reason for them to “walk away” from the property, the investor-owners of the previous mortgage have been fairly compensated, the Smiths might well spend the money they are saving on their mortgage payment at local shops—in other words, everyone is happy. Richmond would sell this new, improved, mortgage on the open market for the $180,000 they paid for it—or more, because now the prospect of default is very, very low— recouping the money it spent on the original purchase.
[i] Wells Fargo Bank National Association, as Trustee, et al. v. City of Richmond, California and Mortgage Resolution Partners Llc, U.S. District Court, Northern District of California, Case No. CV-13-3663