The difference between a sweet victory and a dubious one is often a matter of perspective. Take the housing market which, we’re told, is recovering, albeit slowly and in fits and starts. This represents a trend, an upward-heading line on a chart, and a victory of sorts for the economy. But is it really a victory for the people?
The “housing market” that’s represented by that upward-heading line still comprises millions of underwater mortgage-holders (between 6 and 16 million, depending on who you ask), many of whom are now locked into a David-versus-Goliath battle against creditors that are trying to foreclose and evict them. On this level—where “housing” becomes “houses,” where rates of foreclosure become, for victimized families, “foreclosures”—an overall victory for the market doesn’t mean a whole lot. A trend, that is, has trouble enumerating the individual data points and stories that make it up. To make this dubious victory for the housing market a sweet victory for homeowners, the Home Defenders League, using an innovative concept called Local Principal Reduction, is fighting to write happy endings to some of those stories.
Local Principal Reduction provides a local solution for underwater homeowners facing foreclosure. The CARES program (Community Action to Restore Equity and Stability), developed by Professor Bob Hockett at Cornell Law School, empowers a municipality to work with private investors to acquire the worst private-label securities (PLS) mortgages in town. These are the notorious loans (often predatory) that have been sliced and diced and securitized into investment vehicles by Wall Street, and they are not backed by the federal government via Fannie, Freddie, or Ginnie Mae. Private-label securities are owned by investment trusts, not banks, and as such are not eligible for federal assistance programs. And because the original mortgages have been cut into so many pieces, it’s difficult—and sometimes impossible—to determine who has the authority to refinance them. In other words, underwater homeowners have no one to ask for a life preserver.
But under CARES, a city acquires these underwater mortgages, with the help of San Francisco–based Mortgage Resolution Partners, a law firm with the financial and legal expertise necessary to advise the municipalities and arrange for the private capital that’s necessary to buy the loans. After acquiring the loans, the city then works to refinance these mortgages at current market value, thereby offering a financial life raft—and four walls and a roof—to homeowners facing foreclosure.
But here’s the best part: If creditors refuse to sell, then the city can use the power of eminent domain to seize the properties and refinance them anyway. This saves neighborhoods and prevents the blight and decreasing property values that naturally accompany abandoned homes and empty neighborhoods.
The city of Richmond, California, is at the forefront of the LPR campaign. Bill Falik, an adjunct professor at Berkeley Law, explains: “Richmond has tremendous legal authority to condemn underwater mortgages.… It doesn’t matter if this is a highway project. Foreclosures and underwater properties reduce property taxes and reduce neighboring homes’ value. That’s called blight, and eminent domain is the authority for cities like Richmond to correct blight.” It’s a local solution to a national problem, a sweet victory bearing real results for real people, and more than an abstract line on a graph or a hollow-sounding discussion of “recovery.”
Predictably, the plan has its opponents—namely, the Securities Industry and Financial Markets Association (SIFMA), the industry trade group that represents the thirty or so trusts that own some 5 million PLS mortgages. SIFMA is dead-set against CARES, and it has spent millions to stop it, unleashing its entire arsenal: lawsuits, threatened lawsuits, recall campaigns, radio spots and direct mail. Because of the threatened litigation, CARES is stalled in Richmond, and the city is looking for other municipalities that it can partner with to protect itself. When fighting Wall Street, there’s strength in numbers.
More insidiously, SIFMA has also threatened to raise the price of credit and to categorically deny loans to residents of cities that opt into an LPR program. Denying credit to otherwise credit-worthy people based solely on their city of residence looks suspiciously like illegal redlining. Moreover, since many of the worst PLS mortgages are for houses in predominantly African-American and Latino communities (groups that were targeted by predatory lenders in the first place), this kind of action by SIFMA smacks of discrimination as well.
So what can you do? Kevin Whelan of the Home Defenders League gives three ways to help.
1. Visit fightingforeclosures.org and donate to (or join) the Home Defenders League campaign.
2. Start a campaign or a petition in your community to assist underwater homeowners. E-mail email@example.com for more details.
3. Contact your Representative in Congress and ask him or her to urge HUD and the FHA to comply with antidiscrimination laws that “forbid denying credit to qualified borrowers and ban discrimination based on factors like race and national origin.” Squash SIFMA’s anti-CARES threats.