Something very interesting is happening.
There’s been so much corruption on Wall Street in recent years, and
the federal government has appeared to be so deeply complicit in many of
the problems, that many people have experienced something very like
despair over the question of what to do about it all.
A foreclosed home in Miami, Florida. Joe Raedle/Getty Images
But there’s something brewing that looks like it might be a blueprint
to effectively take on Wall Street: a plan to allow local governments
to take on the problem of neighborhoods blighted by toxic home loans and
foreclosures through the use of eminent domain. I can't speak for how
well the program will work, but it's certaily been effective in scaring
the hell out of Wall Street.
Under the proposal, towns would essentially be seizing and condemning
the man-made mess resulting from the housing bubble. Cooked up by a
small group of businessmen and ex-venture capitalists, the audacious
idea falls under the category of "That’s so crazy, it just might work!"
One of the plan’s originators described it to me as a "four-bank pool
shot."
Here’s how the
New York Times described it in an article from earlier this week entitled, "
California County Weighs Drastic Plan to Aid Homeowners":
Desperate for a way out of a housing collapse that has crippled the
region, officials in San Bernardino County … are exploring a drastic
option — using eminent domain to buy up mortgages for homes that are
underwater.
Then, the idea goes, the county could cut the mortgages to the
current value of the homes and resell the mortgages to a private
investment firm, which would allow homeowners to lower their monthly
payments and hang onto their property.
I’ve been following this story for months now – I was tipped off that
this was coming earlier this past spring – and in the time since I’ve
become more convinced the idea might actually work, thanks mainly to the
extremely lucky accident that the plan doesn’t require the permission
of anyone up in the political Olympus.
Cities and towns won’t need to ask for an act of a bank-subsidized
congress to do this, and they won’t need a federal judge to sign off on
any settlement. They can just do it. In the Death Star of America’s
financial oligarchy, the ability of local governments to use eminent
domain to seize toxic debt might be the one structural flaw big enough
for the rebel alliance to fly through.
The plan only makes sense in the context of America’s overall
economic paralysis. Right now the economy is stuck in a standstill,
largely because of the housing bubble. Five or six or ten years ago,
when Wall Street was cranking out trillions of dollars of cheap home
loans so that they could later be chopped up, pooled, and sold to
unsuspecting investors in the form of high-grade securitized bonds,
millions of ordinary people jumped on the housing comet, buying big
houses for big money.
The problem is, if you bought a house for $300,000 then, it might be
worth $200,000 now. When you’re $100,000 in debt, you’re not rushing out
to buy washing machines, new cars, new DVD players. As Paul Krugman put
it in his
column today:
There’s no mystery about the reasons the economic recovery has been
so weak. Housing is still depressed in the aftermath of a huge bubble,
and consumer demand is being held back by the high levels of household
debt that are the legacy of that bubble.
Then there’s the other problem. Even if you manage to keep making
your payments on your house, your neighbor might not. Whoever used to
live next door has left after a foreclosure: there are squatters
building a meth lab in the basement now. Two more houses are being
boarded up down the street. So now the value of your house is getting
lower and lower every day. No matter how fast you make your payments,
your debt situation is still going to be moving in the wrong direction.
Instead of letting everyone be slowly ground into dust under the
weight of all of that debt, the idea behind the use of eminent domain is
to pull the Band-Aid off all at once.
The plan is being put forward by a company called
Mortgage Resolution Partners,
run by a venture capitalist named Steven Gluckstern. MRP absolutely has
a profit motive in the plan, and much is likely to be made of that in
the press as this story develops. But I doubt this ends up being
entirely about money.
“What happened is, a bunch of us got together and asked ourselves
what a fix of the housing/foreclosure problem would look like,”
Gluckstern. “Then we asked, is there a way to fix it and make money,
too. I mean, we're businessmen. Obviously, if there wasn’t a financial
motive for anybody, it wouldn’t happen.”
Here’s how it works: MRP helps raise the capital a town or a county
would need to essentially “buy” seized home loans from the banks and the
bondholders (remember, to use eminent domain to seize property,
governments must give the owners “
reasonable compensation,” often interpreted as fair current market value).
Once the town or county seizes the loan, it would then be owned by a
legal entity set up by the local government – San Bernardino, for
instance, has set up a JPA, or Joint Powers Authority, to manage the
loans.
At that point, the JPA is simply the new owner of the loan. It would
then approach the homeowner with a choice. If, for some crazy reason,
the homeowner likes the current situation, he can simply keep making his
same inflated payments to the JPA. Not that this is likely, but the
idea here is that nobody would force homeowners to do anything.
On the other hand, the town can also offer to help the homeowner find
new financing. In conjunction with companies like MRP (and the copycat
firms like it that would inevitably spring up), the counties and towns
would arrange for private lenders to enter the picture, and help
homeowners essentially buy back his own house, only at a current market
price. Just like that, the homeowner is no longer underwater and
threatened with foreclosure.
In order to make MRP work, Gluckstern and his partners needed to find
local officials with enough stones to try the audacious plan. With so
many regions in such desperate straits thanks to the housing mess, that
turned out to be not as hard as perhaps might have been expected.
First in line was San Bernardino County in California, not
coincidentally located at ground zero of a subprime bubble blown to
gigantic proportions by Southern Californian mortgage giants like
Countrywide and Long Beach. San Bernardino is more or less a poster
child for the mortgage crisis; more than
half of its homeowners are underwater on their homes, unemployment is past 12%, and the county recently had to
file for bankruptcy.
It’s not surprising, then, that local officials like Acquietta
Warren, mayor of the city of Fontana, were receptive to the
eminent-domain plan.
“Sooner or later,” Warren told the
New York Times, “all
these people who are upside down on their homes are just going to leave
the keys out on the door and say forget it. This was supposed to be the
promised land, and now we have people waiting in some kind of hellish
purgatory.”
San Bernardino County officials, along with two of its bigger cities
(Fontana and Ontario), have set up the legal mechanisms needed to
condemn and seize home loans, but the details of the plan haven’t been
completely worked out yet. Still, officials say about 20,000 homeowners
in San Bernardino would be eligible for the program; how many will get
to use it is unknown.
In the meantime, other counties in other parts of the country are
considering the plan. MRP has been courting local officials in Nevada,
Florida, and in parts of the Northeast. In New York, officials in
Suffolk County on Long Island, where 10% of homes are underwater, are
seriously considering the plan.
The role of MRP and the presence of businessmen like Gluckstern in
this whole gambit is going to tempt some reporters to pitch this story
as a purely financial story, and certainly it does have interest as a
business headline.
But MRP’s role aside, this is also a compelling political story with
potentially revolutionary consequences. If this gambit actually goes
forward, it will inevitably force a powerful response both from Wall
Street and from its allies in federal government, setting up a
cage-match showdown between lower Manhattan and, well, everywhere else
in America. In fact, the first salvoes in that battle have already been
fired.
For instance, the Wall Street trade association, SIFMA, this past week issued a
denunciation
of the eminent domain plan that includes a promise of a legal
challenge. “We believe the MRP proposal is unlikely to survive a
judicial challenge,” one of SIFMA’s lawyers wrote. Other trade groups
are lining up to describe the tactic as illegal or "
unconstitutional."
More insidiously, however, SIFMA
pledged
that its members will not allow future home loans originated in
counties that use the eminent domain tactic to participate in something
called the To-Be-Announced (TBA) markets for mortgage-backed securities.
Explaining this would require a sharp detour into a muck of
inside-baseball mortgage terminology, but the long and the short of it
is that SIFMA is promising to make it difficult for any community that
tries this tactic to obtain private mortgage financing in the future.
Essentially, SIFMA is promising a kind of collusive financial lockout
of uncooperative communities. The threat would appear to be a
high-handed form of redlining that raises serious antitrust questions,
but in a way, that kind of response is to be expected.
Ultimately, the MRP tactic will be a fascinating test case to see
exactly how much local self-determination will be allowed by the
centralized financial oligarchy and its allies in the federal
government.
If through boycotts, collusion, federal pressure and other forms of
encirclement, local governments can be stripped of their right to
condemn blighted property, we’ll know that the guts have been cut out of
the very idea of regional self-rule. It will be fascinating to watch.
At the very least, this story has the potential to be the first true
open, pitched battle between Wall Street and the homeowners and
communities who have been the primary victims of financial corruption.
Tune in for more on this front soon.
Editor's note: Readers interested in learning more about this would do well to read North Carolina congressman Brad Miller's
piece on this in
American Banker.
Miller is not necessarily a proponent of the exact mechanism proposed
by MRP, but he is intrigued by the general idea of using eminent domain
to address the blighted-loan problem, and seems particularly interested
in the strategic possibilities of addressing the problem at the local
level. He writes:
The biggest banks have used their political power in Washington to
defeat any effort that would effectively reduce foreclosures, such as
allowing judicial modification of mortgages in bankruptcy, allowing a
federal agency to use eminent domain to buy mortgages, or providing
teeth for the chronically ineffective Home Affordable Modification
Program, because those efforts would also require the immediate
recognition of losses on mortgages.
But Wall Street's power in Washington may be as useless in defeating a
proposal in San Bernardino County as strategic nuclear weapons are in
fighting an insurgency. No wonder Wall Street is panicked.
Also, here's a
piece Miller wrote a couple of years ago in
The New Republic suggesting
the use of eminent domain through the use of a public vehicle similar
to FDR's Home Owners' Loan Corporation, or HOLC.
Again, there's going to be a lot of heated discussion about this, and
it's sure to get ugly in the near future. This idea will be portrayed
as radical and unrealistic, but in reality it's neither terribly radical
nor even all that new. What it is, more than anything else, is
uncomfortable. Anyway, more on this to come.
© 2012 Rolling Stone
As
Rolling Stone’s chief political reporter, Matt Taibbi
