The fate of the housing market, and the banks that profit from it, could come down to a single city council meeting in Richmond, Calif.
Tonight, the foreclosure-stricken town will decide whether the city will forcibly take underwater mortgages away from the investors that own them to keep people in their homes.
Here's the idea: While banks have been slowly writing down the principal on the nation's 10 million remaining underwater mortgages to reduce their risk of default, a large basket of them have proved tougher to solve. According to Cornell Law Prof. Robert Hockett, 45 percent of those mortgages are locked up in private label securities, which are structurally much more difficult to reduce.
But hey! Cities have the power to simply take over mortgages themselves, through the power of eminent domain — it's a form of property, just like a house or a piece of prairie. So why not seize them, write down the principal to its fair market value, and keep families in their homes?
The problem is, cities with lots of foreclosures don't have that kind of cash to burn, so they need new investors to buy the loans. That's where Mortgage Resolution Partners comes in.
Mortgage Resolution Partners is the project of Steven Gluckstern, a former asset manager and insurance executive who now owns a medical device company, and John Vlahoplus, a Rhodes Scholar who ran Bank of America's residential lending division the 1980s before going to work for BNP Paribas. They brought on investors to underwrite operations, lined up big funds on Wall Street to pay for the new loans, and started shopping their program around to hard-hit cities in California and Nevada. San Bernardino, Calif.; North Las Vegas, and Wayne County, Mich., all seriously considered the idea, with dozens of smaller cities taking a look at it as well.
Now, Gluckstern knew that banks and the securities industry wouldn't like the plan. Anybody forced to give away half of what they're owed on paper isn't going to be happy, no matter how much you argue that the loan was probably going to default anyway. In response, Gluckstern argues that this is a unique prescription tailored to an outlier historical moment, and the idea that using eminent domain now makes the city more likely to use it in the future is silly.
"It's once in a lifetime that you're going to see in residential houses this kind of movement in the asset class," he says. "This is a hairball stuck in America's economic throat. You got to hack up the hairball. It doesn't go away."
Still, he didn't quite realize how hard industry groups would be willing to fight it. Groups like the American Securitization Forum, Credit Union National Association, National Association of Realtors and the Mortgage Bankers Association of America have lobbied Capitol Hill to ban the procedure, and funded aggressive media campaigns to discredit it. Whenever they hear about a new city considering MRP's proposal, the Securities Industry and Financial Markets Association sends out a thick packet of information detailing how it will make lenders hesitate to loan in the future, or increase rates to offset the risk.
"There is no doubt, investors will not put capital to work in a jurisdiction where there is a threat of a taking," says Tim Cameron, SIFMA's point person on the issue. "We're going to go to those with the best credit, and where the belief in property rights are sound."
So far, they've been successful. City after city has opted against MRP's proposal, overwhelmed by the negative industry response, including threats of litigation. San Bernardino county heard little good about it besides Gluckstern's attestations.
"At the end of the day what we had was a lot of people from the investment community saying the world would come to an end if we did this," county spokesman David Wert told KQED. "The problem was, we really didn't have a lot of people saying this would not happen, and that it was a great idea."
Richmond is the last remaining jurisdiction that's made it anywhere close. The 100,000-person city at the north end of San Francisco Bay is the archetypal bubble town: The median sale price peaked in 2006 at $456,000, and troughed in 2011 at 140,000. Although Richmond has affluent waterfront neighborhoods, according to the city's research, 51 percent of homeowners are underwater. The percentage for loans stuck in private label securities is even higher, at 67 percent. Sixteen percent of mortgages in the city have gone into foreclosure, which the city argues has worsened crime, vacancy, and blight.
In late July, the city issued letters to the holders of the notes on 624 homes asking them to sell the city the mortgages at fair market value. The letters were refused. Instead, Wells Fargo and Deutsche Bank, acting as trustees for a laundry list of securities trusts, sued in U.S. District Court to stop the city from moving forward with the program. What's more, the Federal Housing Finance Agency threatened to quit lending in jurisdictions that went the eminent domain route, which fair housing groups argue would be illegally discriminatory.
Where other cities have stopped in their tracks, Richmond has soldiered on, driven in part by a Green Party mayor who founded a progressive front that has crusaded against expanding the local Chevron refinery and a proposed casino. It's also benefited from the organizing of the Alliance of Californians for Community Empowerment, an offshoot from ACORN, which learned a lesson from San Bernardino and has been holding meetings, rallies and phone banking sessions from the start (ACCE receives funding from the nonprofit coalition Leadership Center for the Common Good, to which MRP has contributed).
It's sometimes a tricky sell: The opposition, funded by the local, state and national Realtor associations and orchestrated by a local strategic communications firm, casts the program as a way for "Wall Street" to "take a bite out of Richmond homes" by using a tool more often used to displace minority communities than to help them out. For dozens of labor and social justice groups, it's now the only weapon against the banks they've got.
"This is what the federal government should've done, this is what the banks should've done in a more widespread way," says Amy Schur, a campaign director for the ACCE-affiliated Home Defenders League. "And after years of pushing them to do it, local communities are stepping in to do what should've been done."
Nevertheless, enough opposition exists that a couple councilmembers plan to introduce a resolution at a special meeting tonight to scrap the eminent domain option. If they do, like every jurisdiction has before them, the lawsuit becomes moot — which means a court likely won't resolve the legal uncertainty — and MRP loses its best option to create a proof of concept.
Which wouldn't necessarily mean the option is dead. MRP still has advisory services agreements with six cities, which could still choose to move forward. On Wednesday, Seattle plans to hold a hearing on a report by Robert Hockett how it might do something similar.
But Wall Street will have gotten a lot closer to stamping out the threat.