by James Stefanile, ABR, GRI, SRES, QSC, gCertified, REALTOR/Salesperson Prudential NJ Properties, Montclair Office
The PBS Newshour broadcast this excellent report on September 19th about the eminent domain strategy being considered in Richmond, California to address its foreclosure and mortgage crisis. Click the play button to see The Newshour report:
This report makes a number of new points about Richmond’s strategy. For those of you who don’t follow this blog religiously (What!!!), the August 2013 post deals with this issue in detail. In summary, the city of Richmond, CA wants to help some underwater homeowners by offering to buy their mortgages from the lenders at approximately 80 per cent of fair market value and then sell the amended, modified loans back to the homeowner. The borrower would then have a loan that reflects the current value of their home and may even have some equity back. If the lender refuses to sell the loan, the city would invoke eminent domain, seize the loan, pay the lender and proceed. Richmond has been particularly hard hit by declining home values and foreclosures and the municipal government is attempting to stem the deleterious effects of crime, blight and eroding neighborhood home values resulting from this crisis.
The thing that got my attention in this broadcast piece is the furious blowback from Wall Street, mortgage lenders and REALTORS. The Newshour report features California REALTOR Jeffrey Wright (who is part of a campaign by the California Association of REALTORS) using very florid language to put the blame squarely on borrowers. He says, in effect, no one forced them to accept their loans. OK, but how about when the home is worth half of what the loan is. Is that the borrower’s fault as well? And what if the lender won’t modify the loan or provide principal reduction to reflect the current value of a property? And what if the loan is securitized and it’s very hard to tell who the lender is? I suppose the distressed homeowner is at fault there as well.
This REALTOR made me cringe as he just sounded like a man whose potential short sale commissions are in jeopardy. It’s shameful. This is why the American people regard us REALTORS as nothing more than used car salesmen in better suits. He says the lenders have no legal obligation to re-negotiate the loans. The California Association of REALTORS says there are other ways for distressed property owners to deal with the issue. What ways? The Federal Government programs which the National Association of REALTORS trumpet as a viable alternative for homeowners has only helped the tiniest fraction of Americans in mortgage distress. What other alternatives do homeowners have? Short sales – that’s it, barring an unlikely loan modification with principal reduction. Guess who profits financially from short sales? Shame on us.
It’s time to move forward and away from these old chestnuts which make us REALTORS toadies of the banks. We need to be on the side of what is best for consumers, the economy and the towns we live and work in. We need to be on the side of solving this problem of underwater, distressed properties which one of the interviewees in the Newshour report calls “a hair ball stuck in America’s economy and it’s got to get hacked up”. If we REALTORS are supposed to be the “protectors” of home ownership, Mr. Wright takes a curiously adversarial position toward home owners. It appears he’s more in favor of a large migration from his town and vacant, blighted properties because of short sales and foreclosures.
As a REALTOR I don’t advocate helping irresponsible borrowers. I have never seen myself as a social worker. Richmond is targeting responsible, qualified borrowers who are in trouble, mainly through no fault of their own. I believe that the hugely corrosive effects of the mortgage crisis on the country demand a shifting paradigm among all concerned with real estate.
The report also notes that Richmond and the group of investors it’s working with are targeting 624 underwater Richmond borrowers who have what’s known as private label securitized mortgages where loans are bundled away from the original lenders, trusts are formed and then an interest in them is sold to investors in the form of bonds. It’s almost impossible for a homeowner with this type of loan to know who to negotiate with to modify the loan and it was pointed out that half of these loans nationwide are underwater and in danger of default. The trustees for the bond holders are – guess who? – some of the biggest banks in the country. So we can rely on their blind capitalism to do nothing but try to squash any initiative which may, in their minds, threaten their position.
A bond manager in the report calls the eminent domain strategy “stealing”. He says the everyday American who invests in these bonds will be cheated. I suppose he thinks it’s a better deal for these investors to lose a huge portion of their money through foreclosure and auction, rather than being paid 80 per cent of fair market value. When a foreclosed property goes to auction the lender doesn’t take a haircut on the old, obsolete, larger value of the property. The investor gets shorted, most times by half, on the new, smaller value.
The report also shows a contentious Richmond city council meeting where angry and fearful citizens (who are not in mortgage distress) worry about no credit being extended to Richmond and about lawsuits by the financial industry. Richmond Mayor Gayle McLaughlin, who is spearheading the eminent domain strategy, makes the very legitimate point that lenders boycotting a town would be illegal. It’s the same as real estate brokers breaking the law if they boycott another broker’s listings. The criticisms of the eminent domain strategy are all fear based and don’t hold up to close scrutiny. Some Richmond citizens at the council meeting blamed the distressed homeowners and called this another bailout. It’s not, it’s a solution which protects the property value of every homeowner in town. Those citizens think they are being cheated when the town extends a helping hand to their distressed fellow citizens. I won’t even get into how selfish this attitude is. This smacks of Tea Party reactionary nonsense. It’s an incredibly short sighted, misguided and fear based position. What hurts some citizens hurts all.
Other criticisms from the financial and real estate industries sound equally flimsy as they seem to be desperately protecting a paycheck with no regard for the bigger picture. A municipality has the right to protect its economic value, citizens and quality of life and has a responsibility to advocate for its citizens. The Federal Government doesn’t seem to be stepping up and the banks are hovering. Who’s left to represent home ownership? Doesn’t seem to be REALTORS, even though our advertising positions us as such.
Richmond has been unable to sell its highly rated municipal bonds on the open market. This demonstrates obvious, shameful collusion on the part of the financial industry. But a coalition of investor bondholders who sued Richmond recently lost their suit in Federal Court. The city will have to keep its resolve in the face of these spurious assaults on its authority.
Inertia serves no one. Richmond says it wants to use eminent domain only as a last resort but would rather work out a deal with the lenders, bondholders and trustees. The financial industry’s reaction has been to try to stonewall Richmond and any other municipality with the temerity to attempt this strategy. The bondholders’ actions represent an attempt to ensure the status quo which does no one any good. The banks and Wall Street offer no solutions other than short sales or foreclosing and selling the properties at auction. All the financial pundits, for years, have been saying the market has to solve the mortgage crisis in this country through foreclosures “cleansing” the market. We’ve all seen how honest and straightforward financial markets have been when left to their own devices. No one benefits. The foreclosure solution pays, maybe, 40-50 cents on the dollar to investors. Richmond is offering to buy the loans at an appraised, fair market value of 80 cents on the dollar. It’s time to fill the inert void in the foreclosure issue with new thinking and it’s time for the National Association of REALTORS and REALTORS around the country to find their conscience outside of their pocketbooks.