On Tuesday, I attended a panel discussion at the Center for American Progress on the use of eminent domain to stop foreclosures. This controversial program is being seriously considered by dozens of cities, including some in the Central Valley. After the panel, I was able to catch up briefly with Steven Gluckstern, Chairman of Mortgage Resolution Partners (MRP)– the firm pioneering the use of eminent domain to save homes– who told me that even Stockton, with all of its bankruptcy woes, could implement this tactic. I came away from the discussion with some great insight into the benefits and dangers of using eminent domain, and in the foreclosure capital of the world, Stockton’s leaders should be willing to at least give this option a look.
Even though the housing market appears to be on the rebound, Gluckstern feels that the worst of the foreclosure crisis is actually ahead of us, noting that three million more homes are yet to be foreclosed upon, which would affect approximately 20 million Americans. In Stockton, the crisis may appear to be over, but foreclosures continue to pose significant problems for families, neighborhoods and city officials.
I originally wrote about the use of eminent domain to intervene in the housing market in August, when San Bernardino County began seriously considering MRP’s proposal. Since then, cities as large as Chicago and as small as Salinas have kicked around this idea, though no city has been brave enough to pull the trigger. However, Gluckstern has said that MRP has a small city ready to implement the program, and I imagine the question now is not if this plan will be used, but when. The nuts and bolts of MRP’s proposal are complex, but it boils down to a simple idea: using eminent domain to take homes in danger of foreclosure in order to give them back to the homeowners at a reduced rate. Here is a summary of how it would work:
- A city uses eminent domain to seize the mortgage of an underwater home that is in danger of foreclosure under the pretense that a foreclosed home would subject a neighborhood to blight, and preventing that blight can be considered a public good
- The city then pays fair market value to the mortgage holder (in MRP’s proposal, a city could only consider mortgages that are held by trusts, not FHA backed).
- The city then returns the home back to the homeowner at a substantially reduced monthly mortgage rate as the new mortgage would reflect the new market price. The mortgage would be held by investors lined up by MRP.
In theory, this plan makes everyone better off: Mortgage holders, who were never going to get the original value of the mortgage anyway, are able to cut their losses and avoid the costly foreclosure process; the city avoids the hassle of vacants and foreclosures purchased by out-of-town investors who turn out to be slumlords; families stay in their homes with reduced payments and in turn use those savings on local goods and services, stimulating the economy.
But MRP is not without detractors, and whichever city decides to invoke eminent domain for this purpose will face a firestorm of Wall Street law suits. Tom Deutsch of the American Securitization Forum was also a part of the panel, and felt that eminent domain is unnecessary and would amount to a loss of $300 billion for the people he represents. Instead, Deutsch felt that mortgage holders should be more willing to sit down with homeowners who are facing hardships to restructure their payments. MRP’s plan, Deutsch contends, cherry picks homeowners who are still on time with their payments,
Deutsch’s concerns should be taken in context, as his organization advocates for those entities which stand to lose money. First, $300 billion is a grossly over exaggerated number as the value of the mortgages in question will never reach pre recession levels. Further, it’s been about five years since the bottom dropped out of the housing market, and the financial sector has not come up with any solutions, nor has Washington produced meaningful legislation. Congressman Brad Miller of North Carolina– another speaker on the panel– introduced legislation to allow bankruptcy judges to modify mortgages back in 2009, but that effort was derailed and heavily opposed by Deutsch’s organization (a position that Deutsch strongly reiterated during the discussion). Similarly, Right to Rent legislation faced similar opposition and never got a vote.
But cities should proceed with caution. MRP is a for-profit firm, which Gluckstern makes no secret of. MRP works with cities to tailor their plan to them, charging the city $4,500 per house successfully returned to the homeowner (Gluckstern explained during the discussion that the fee amount was chosen because $4,500 is what the federal government pays a servicer to rewrite a mortgage). Also, because MRP’s plan applies only to people who are current on their payments, there is some concern that those who are truly in need will be not eligible. Jim Carr of Opportunity Agenda felt that while eminent domain has the potential to stabilize the housing market, MRP’s plan might pass over the worst neighborhoods, leaving poor and minority homeowners in the cold.
But can this work in Stockton, a city in the throes of bankruptcy? Yes, believes Gluckstern. While bankruptcy proceedings would complicate implementation, Gluckstern said that Stockton could still pull off the plan (though he could have just been giving me a sales pitch).
However, just because the city could do it, doesn’t mean that it should. Mired in bankruptcy, I am not sure that Stockton has the capacity to implement such a controversial program. Lawsuits will surely follow, and Stockton has seen enough of those. However, foreclosures are what drove Stockton into the ground in the first place. If anything can be done to help stop more foreclosures, keep families in their homes and stabilize neighborhoods, the city should at least look into it. Several other Central Valley cities, including Merced and Sacramento, have brought in MRP to hear them out. Because Stockton was ground zero for the foreclosure crisis, city leaders should be looking for every and any way possible to get the city back on track. Maybe using eminent domain is not the way to go, but Stockton doesn’t have the luxury to leave any options off the table.