Tag Archives: underwater mortgages

The State of the Union’s Housing in 2016

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photo by Lawrence Jackson

The Joint Center for Housing Studies of Harvard University has released its excellent annual report, The State of the Nation’s Housing for 2016. It finds,

With household growth finally picking up, housing should help boost the economy. Although homeownership rates are still falling, the bottom may be in sight as the lingering effects of the housing crash continue to dissipate. Meanwhile, rental demand is driving the housing recovery, and tight markets have added to already pressing affordability challenges. Local governments are working to develop new revenue sources to expand the affordable housing supply, but without greater federal assistance, these efforts will fall far short of need. (1)

Its specific findings include,

  • nominal home prices were back within 6 percent of their previous peak in early 2016, although still down nearly 20 percent in real terms. The uptick in nominal prices helped to reduce the number of homeowners underwater on their mortgages from 12.1 million at the end of 2011 to 4.3 million at the end of 2015. Delinquency rates also receded, with the share of loans entering foreclosure down sharply as well. (1)
  • The US homeownership rate has tumbled to its lowest level in nearly a half-century. . . . But a closer look at the forces driving this trend suggests that the weakness in homeownership should moderate over the next few years. (2)
  • The rental market continues to drive the housing recovery, with over 36 percent of US households opting to rent in 2015—the largest share since the late 1960s. Indeed, the number of renters increased by 9 million over the past decade, the largest 10-year gain on record. Rental demand has risen across all age groups, income levels, and household types, with large increases among older renters and families with children. (3)

There is a lot more of value in the report, but I will leave it to readers to locate what is relevant to their own interests in the housing industry.

I would be remiss, though, in not reiterating my criticism of this annual report: it fails to adequately disclose who funded it. The acknowledgments page says that principal funding for it comes from the Center’s Policy Advisory Board, but it does not list the members of the board.

Most such reports have greater transparency about funders, but the interested reader of this report would need to search the Center’s website for information about its funders. And there, the reader would see that the board is made up of many representatives of real estate companies including housing finance giants, Fannie Mae and Freddie Mac; national developers, like Hovnanian Enterprises and KB Homes; and major construction suppliers, such as Marvin Windows and Doors and Kohler. Nothing wrong with that, but disclosure of such ties is now to be expected from think tanks and academic centers.  The Joint Center for Housing Studies should follow suit.

Thursday’s Advocacy & Think Tank Round-Up

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  • On June 23, at 2pm the Urban Land Institute, John D. and Catherine T. MacArthur Foundation, and Hart Research are hosting a Virtual Conversation entitled: Housing, Communities, & Messaging that Resonates: Results from Three New Polls (RSVP Here).
    • Americans’ housing and community preferences in this rapidly changing landscape,
    • where and how Millennials want to live,
    • overall satisfaction with government’s prioritization of housing affordability, and
    • the most persuasive messaging about affordable housing.
  • Corelogic’s Equity Report finds that 245,000 properties regained equity in the first quarter of 2015 – over 90% of properties have positive equity and the percentage of “underwater” mortgages decreased by over 19% year-over year.

Welds on Eminent Domain for Underwater Mortgages

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One of the great joys of being a professor is being able to brag about your students’ accomplishments.  Brooklyn Law School just posted this about Leanne Welds on our website:

Leanne Welds ’14 has been awarded the 2014 Brown Award by The Judge John R. Brown Scholarship Foundation for her paper “Giving Local Municipalities the Power to Affect the National Securities Market.” The Brown Award recognizes excellence in legal writing in American law schools. This is the first time a BLS student has taken first place in the national competition, which awards a $10,000 stipend to the winner.

Welds is currently an associate at Simpson Thatcher & Bartlett LLP in its Real Estate Group. As a student, she served as Executive Articles Editor for the Brooklyn Law Review and was the recipient of the Lorraine Power Tharp Scholarship from the New York State Bar Real Property Section. She was a member of the Community Development Clinic taught by Professor David Reiss, and externed with Enterprise Community Partners, an affordable housing firm. She also served as secretary of the Black Law Students Association.

“It is truly gratifying to have my work recognized in this way,” Welds said. “I picked this topic for my Law Review Note because of my combined interests in both the real estate and social justice aspects of the issue, but I never once thought I could be writing an award-winning paper. I am especially thankful to Professor David Reiss for believing in my work and sponsoring me for this competition, as well as both Professor Brian Lee and Professor Reiss for their detailed and thoughtful comments throughout the drafting process.”

Welds’ winning paper evaluates the constitutionality and wisdom of plans by local governments to condemn underwater mortgages without also condemning the land that is attached to the mortgages. These plans are in response to the foreclosure crisis that has hit certain communities particularly hard. If successful, these plans would result in refinanced and smaller mortgages on homes that have seen their values drop dramatically since the start of the financial crisis. The financial industry opposes these plans because they would reduce the face value of the existing mortgages.

“Leanne is a perfect candidate for this prize,” said Professor David Reiss. “Her passion for the law is complemented by an excellent work ethic, good legal judgment, and serious intellectual firepower. Leanne is a rising star of the bar. I have no doubt she will not only be a valuable member of the bar, but that she will also play a leadership role in the community.”

Hockett on NYC Eminent Domain

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Bob Hockett has posted ‘We Don’t Follow, We Lead’: How New York City Will Save Mortgage Loans by Condemning Them to SSRN. The abstract reads,

This brief invited essay lays out in summary form the eminent domain plan for securitized underwater mortgage loans that the author has been advocating and helping to implement for some years now. It does so with particular attention in this case to New York City, which is now actively considering the plan. The essay’s first part addresses the plan’s necessity. Its second part lays out the plan’s basic mechanics. The third part then systematically addresses and dispatches the battery of remarkably weak legal and policy arguments commonly proffered by opponents of the plan.

Hockett has been advocating this plan for some time in the face of concerted opposition from the financial industry. One industry argument that I have found to be over the top is that lenders will refuse to lend in communities that employ eminent domain to address the foreclosure crisis. Hockett writes,

Another policy argument made by some members of the securitization industry is that using eminent domain to purchase loans will dry up the sources of mortgage credit, rendering the American dream of homeownership unattainable. The financial services industry and its legislative supporters have made this kind of claim against regulatory and consumer protection proposals emerging from national, state, or municipal legislatures.

One problem with this argument is that private credit has not flowed to non-wealthy mortgage borrowers since the crash. Federal lenders and guarantors are nearly the only game in town, and they are likely to remain so until the underwater PLS loan logjam is cleared.

Another problem with the credit withdrawal argument is that it characterizes a benefit as a burden. The housing bubble was, like most of the more devastating bubbles through history, the upshot of an over-extension of credit. Lenders extended excess credit through reverse redlining and other predatory lending practices perpetrated or aided and abetted by participants in the securitization industry itself. Hence the securitization industry’s warning that credit might not be overextended in the future is a warning of something that might well be desirable. (142-43, footnotes omitted)

Given that lenders always rush to lend to countries that have recently defaulted on their sovereign debt, I don’t find the credit withdrawal argument to be particularly convincing here. But it may succeed in convincing some local governments not to proceed with their eminent domain strategies. I do hope, however, that at least one locality will follow through during the current foreclosure crisis. That way, we will at least have a proof of concept for the next foreclosure crisis.

 

Eminent Distraction?

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The Urban Institute posted Eminent Domain:  The Debate Distracts from Pressing Problems. The issue brief concludes

The negative indicators shared by municipalities that have considered the eminent domain solution (e.g., high unemployment, low incomes, high proportions of underwater homeowners, slower HPI recovery, etc.) indicate that their shared problems extend beyond housing. These cities have traditionally suffered from lack of investment, high crime rates, concentrated poverty, and other general barriers to opportunity. These factors contributed to their poor performance during and after the housing crash, and the relief efforts to date, both from lenders and policymakers, have been modest relative to the scale of the problem.

Yet it is unclear that seizing loans through eminent domain will produce the desired outcomes: preventing foreclosures and, thus, ensuring that the community fabric and the municipality’s economy remain intact. For example, Richmond is targeting performing loans in PLS, and while the eminent domain plan is designed to help underwater mortgage holders, investors assert that nearly a third of target loans are above water. In contrast, a much wider universe of nonperforming, underwater loans is in private-label and agency securities that are, arguably, at more immediate risk of default. Additionally, implementing eminent domain will likely have repercussions in the housing finance markets that will lead to higher interest rates and down payments.(14)

www.crackerjackcharters.com/images/gallery/data/

The conclusion then outlines “some less disruptive alternatives.” (14) I am not sure that I agree with all of the conclusions of the report.  For instance, I doubt that there would be higher interest rates and down payments as a result of the use of eminent domain by municipalities.  Lenders have notoriously short memories (for a survey of short lender memories, see This Time Is Different.) But this issue brief is important because it is not looking at the legality of the use of eminent domain — others have done that — but at the practicality of this approach. And it raises serious concerns that will need to be addressed by its proponents.

Underwater Mortgages Eminent Domain Battle Gears up

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I was quoted in a recent story in www.thestreet.com, Eminent Domain Mortgage Battle Is a Lose-Lose Situation.  It reads in part,

The move by Richmond, Calif., to seize “underwater mortgages” from private investors using its powers of eminent domain has drawn controversy and consternation within the mortgage industry.

The law has mostly been used to seize property for public purposes such as building roads, highways or schools and other critical infrastructure.

Richmond is now testing whether the rule can be applied to seizing underwater mortgages.

Home prices in Richmond, a city with a population of a little more than 100,000 and a significant Hispanic and African-American presence, are still far below peak levels. More than half of its homeowners are underwater — they owe more than their homes are worth.

Richmond Mayor Gayle Mclaughlin said eminent domain is the only way to help borrowers and repair the local economy, as investors of private-label mortgages have been either reluctant or too slow to provide relief to borrowers.

The city, partnering with San Francisco-based Mortgage Resolution Partners (MRP), began sending letters to owners and servicers of 624 underwater mortgages this week.

If the investors do not agree to sell at the negotiated price, the city will seize the property through eminent domain.

The mortgage industry is, predictably, threatening a legal battle.

* * *

“The constitutional challenges for this proposal are weak,” according to David Reiss, law professor at the Brooklyn Law School.

* * *

The bigger source of legal conflict, according to Reiss and other experts, would be on determining what is fair compensation for a mortgage, especially one that is still current.

* * *

“Courts tend to overcompensate properties taken under eminent domain as a general rule,” said Reiss. “The proponents of this rule may be underestimating how these mortgages will be valued.”

* * *

Eminent domain is “theoretically a great idea,” said Reiss. “States certainly have the legal authority to try this experiment. But it is not clear whether the outcome of all this is beneficial.”

Underwater Domain

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The securitization industry is still fighting tooth and nail against the proposal to use the power of eminent domain to acquire underwater mortgages from private-label mortgage-backed security trusts.  Four California towns are considering working with Mortgage Resolution Partners LLP to take mortgages in their communities by eminent domain and then refinance them at current rates and with valuations that reflect today’s prices.

The heavy hitters in the industry — including the ABA, MBA and SIFMA — have written to the four communities  (San Joaquin letter here) warning of the consequences of proceeding.  Some of the warned of consequences appear to be thinly veiled threats such as, we are going to sue your pants off.  Some are constitutional challenges, although I think that they are overstating their case in that regard.

The letter does, however, raise some important legal, business and practical concerns that will need to be addressed if the proposal is actually acted upon.  Will the municipalities have jurisdiction over the mortgage notes if they are located out of California and is that necessary to proceed?  Will lenders punish communities that employ eminent domain in this way by making less credit available in the future?  Will the proposal be financially workable if fair market value for the mortgages is actually paid?  To what extent will “widows and orphans” be hurt by this proposal because pension funds are big holders of MBS?  These are important questions without obvious answers. Given what is at stake, it seems worth sketching out the answers a bit more before rejecting this innovative proposal out of hand.