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.