A Visit to the Front Lines: Richmond, California, Eminent Domain & Mortgage Resolution Partners
Want to make a banker get all hot under the collar in less than ten seconds?Â Itâ€™s really easy.
Just tell him or her that youâ€™re in favor of using eminent domain to take over underwater loans in order to write them down for homeowners.Â Whomever youâ€™re talking to probably wonâ€™t come out and say it, but thereâ€™s a good chance that after youâ€™ve walked away, they regrettedâ€¦ if only for a momentâ€¦ not slashing your tires in the parking lot.
I honestly think many would prefer someone walk in and rob their bank at gunpoint then come in to argue in favor of using eminent domain to write down loans for underwater homeowners.
Eminent domain, after all, is the antithesis of free market capitalism.Â But, itâ€™s also not unheard of, by any means, and has been used for similar reasons in past years.Â Not identical reasons, but similar ones.Â And itâ€™s even listed among the â€śrisksâ€ť in most, if not all prospectuses that are used in conjunction with the sale of mortgage-backed securities, so itâ€™s not like no one has ever contemplated such an event until now.
Generally speaking, the opposition to cities using eminent domain to deal with underwater mortgages turns positively red-faced as they lambast you with statements about private property rights and constitutionality issues, but more than anything else, it quickly becomes clear that more than anythingâ€¦ they just donâ€™t think itâ€™s necessary to take such drastic measures.
They simply donâ€™t want anything to change.
Prices have stabilized after seeing double-digit increases in 2013, and housing markets, theyâ€™ll assure you, are recovering or have recovered.Â Calm down and donâ€™t rock the boatâ€¦ everythingâ€™s going to be fine, donâ€™t you know.Â Someone get Moodyâ€™s Chief Economist, Mark Zandi over here to sing from Zillowâ€™s latest report and everyone will feel better in no time.
Yeah, wellâ€¦ not so much.Â I think weâ€™re done with believing any of that by now, arenâ€™t we?
Zandi and his ilk have been cheerleading irrationally since 2006 about how the economy is sure to be recovering right around the corner, and itâ€™s long-since reach the point where anyone could possibly take him or anyone else sharing his views, even remotely seriously.Â Not to put too fine a point on it, but I think the man is either a bear of very little brain, or heâ€™s just a well-paid and willing spokesliar.
God bless Barry Ritholtzâ€™s site â€śThe Big Picture,â€ť for keeping a record of classic Zandi-isms, and hereâ€™s just a smattering of the prescience that has crossed his overly pursed lips since 2008â€¦
Reuters â€“ June 26, 2008
â€śZandi said home prices, based on the S&P/Case-Shiller data, have fallen about 15 percent and he is expecting them to drop another 10 percent before reachingÂ a trough in the spring of 2009.â€ť
Bloomberg â€“ Feb 9, 2008
â€śâ€¦ the bottom of the housing downturn is within sight,â€ť chief economist Mark Zandi said in a statement today. â€śPresuming we see strong action by policymakers to help support the economy and the housing market, prices will begin to recover by the end of this year.â€ť
September 13, 2008
â€śDespite the tumult, the bottom for the housing market, financial system and economy is coming into view. The US still faces a painful slog, lasting well into 2009, but by this time next year a self-sustaining economic recovery is expected to begin.â€ť”
NPR â€“ Jul 23, 2009
â€śâ€¦ the housing market is stabilizing,â€ť said Moodyâ€™s economist Mark Zandi. â€śIâ€™m expecting that by this time next year the market will have hit bottomâ€ť
New York Times â€“ Feb 19, 2010
â€śMr. Zandi of Economy.com said he expected the nationâ€™s housing prices to fall another 8 percent during 2010 and bottom out by the end of the yearâ€ś
Marketwire â€“ May 13, 2010
â€śZandi also forecasts improving demand for housing, but with foreclosures rising later in 2010 before easing in 2011. He said home prices may weaken this year. â€śThe housing crash is over â€” nearly. We are now near the bottom,â€ť he said. â€śThere will be no real price growth in 2010 or 2011. Whether home prices weaken is unclear, but it will take two more years to work off excess housing inventory at the current sales pace. Of course, if demand picks up, it would take less time for prices to rise,â€ť he said.â€ť
(Look, whatever you do, DO NOT try to re-read that last paragraph in the hopes of being able to follow what heâ€™s saying the second time through.Â I just did exactly that, and had to go lie down for an hour before the room stopped spinning.)
The point Iâ€™m trying to make is that enough really is enough with the whole â€śrecovery is around the cornerâ€ť crapâ€¦ WEâ€™VE BEEN LIED TO SO MUCH AND FOR SO LONG THAT â€śTHE BOY WHO CRIED WOLFâ€ť DOESNâ€™T EVEN COME CLOSE TO PROVIDING ANY SORT OF MORAL FOR THIS STORY.
Last year, our housing markets managed to deceive many Americans with their reported, yet largely meaningless â€śdouble-digitâ€ť price increases, driven purely by a Bernanke-inspired refinance boom and the gaggles of giddy investors flush with private equity funds, and looking to capitalize on the misfortune of others.
Of course, all of that was over as of last July, but denial remained strong right up until the end of last calendar year when finally, even the Mortgage Bankers Association felt compelled to say that they expected a 32 percent drop in demand for residential mortgages in 2014â€¦ which is another way of saying â€śa third,â€ť by the way, and should have sounded an alarm reminiscent of Titanic when it struck the infamous berg.
This year, Januaryâ€™s housing market numbers were bad, which was inexplicably blamed on the weather back East, even though the numbers for the West were even worse.Â Februaryâ€™s, however, were downright abysmalâ€¦ weather again, combined with higher rates that I couldnâ€™t find anywhere.Â By March new or existing homes sales were getting so ridiculously low that even prolific liars were finding it uncomfortable to lie about what was going on.
And as of Aprilâ€™s end, homeownership in this country had fallen to a 19 year low, with existing home sales falling to their lowest level since 2012, while the annual rate of new home sales plummeted 14.5%.
According to National Association of Realtorsâ€™ spokesperson Walter Molony, the only things weâ€™re lacking are jobs, credit, household formation, buyers, sellers, and an economy.Â (Okay, so I made up a couple of those â€śthingsâ€ť at the end of that sentence, but so what?Â Iâ€™m sure he meant to say them and just cut it short.)
Investment banker and financial industry analyst, Christopher Whalen, who earlier this year in a phone conversation was reluctant to agree with my gloomy forecasts for home sales in 2014, seems to be getting closer to adopting my way of thinking.
Writing for American Banker in March, Chrisâ€™ headline, â€śU.S. Housing Sector is In Big Trouble,â€ť seemed to sum things up nicely, but his opening paragraphs were equally spot-on, as they sayâ€¦
â€śEvents in the Ukraine have been distracting the global financial markets, but for investors and financial institutions in the U.S., the deteriorating economic fundamentals in the housing sector are probably a more urgent concern.Â While many parts of the U.S. economy are growing, the housing sector is increasingly a drag on consumption and job creation.â€ť (Emphasis mine.)
Whalen also pointed out that the FHFA’s principal economist, Andrew Leventis (predictably) cautioned: “It is too early to know whether the lower quarterly growth rate represents the beginning of more normalized price appreciation patterns or a more significant slowdown.” Â
(Translation: We donâ€™t need to use eminent domain, people.Â Itâ€™s only been seven years so itâ€™s too earlyâ€¦ and it always will be â€śtoo early.â€ť)
â€śMost housing indicators suggest that the overall rate of home price appreciation is slowing considerably, with a few of the more attractive markets around the country. accounting for most of the upward momentum.Â Home prices probably peaked overall in the second quarter of 2013, but the time delay in most of the major data series on housing masks this reality.
Chris also points out some of the distortions caused by averages, saying:
â€śBecause home sales among higher priced properties have been growing more than among lower-price tiers, the Realtors’ median price had risen by more than the weighted repeat sales index, which computes price change based on repeat sales of the same property.
While average home prices have returned to 2004 levels, 20% to 30% of American homeowners remain either underwater on their mortgages or have too little equity to sell their homes. A lack of supply of homes is actually driving appreciation in many of the hottest markets, but sales volumes remain well below pre-2007 levels.
Applications for home mortgages, including both new purchases and refinancing, are at the lowest levels in more than a decade. While many observers blame rising interest rates for the paucity of new loan applications, factors such as a poor job market, flat to down consumer income and excessive regulation are probably more important.â€ť
And finally Chrisâ€™ forecast for 2014, with emphasis added by meâ€¦
“When home prices measures generally start to fall later this year, maybe our beloved public servants in Washington will start to get the message.”
You see, contrary to what some headlines would have you believe, when demand falls, prices followâ€¦ periodâ€¦ which makes this recent headline from Dr. Housing Bubbleâ€¦ a problem for all sorts of reasons: â€śSouthland home sales reach six-year low, while median price reaches six-year high.â€ť
Dr. Housing Bubble summarized as follows:
â€śHouse horny buyers will always find a reason to buy.Â They donâ€™t mind spending 50 percent or more of their net take home income on purchasing a California home.Â For some, housing is everything.â€ť
Itâ€™s positively Bublicious, but out here in So Cal, we apparently have no short-term memory left.
Now contrast what Mortgage News Daily reported on April 17, related to the percentage of underwater loansâ€¦
â€śIn the fourth quarter of 2013 RealtyTrac said there were 9.3 million properties or 19 percent of mortgaged homes that were that seriously underwater and in the first quarter 2013 there were 10.9 million or 26 percent.Â The recent peak in negative equity was the second quarter of 2012, when 12.8 million U.S. residential properties representing 29 percent of all properties with a mortgage were seriously underwater.â€ť
Even eternal optimist, Daren Blomquist, vice president at RealtyTrac added the followingâ€¦
“U.S. homeowners are continuing to recover equity lost during the Great Recession, but the pace of that recovering equity slowed in the first quarter, corresponding to slowing home price appreciation,” said. “Slower price appreciation means the 9 million homeowners seriously underwater could still have a long road back to positive equity.â€ť
Actually, if you take all of that euphemistic drivel as a whole, youâ€™ll realize that in the real worldâ€¦ like the world you and I live inâ€¦ home prices are falling once againâ€¦ and that should surprise no one.Â Multi-million dollar homes, because there are so few on the market, may look like theyâ€™re going up by a few clicks here and there, but so what and who cares?
Count on this, howeverâ€¦ if more homes came on the market, prices would fall fast, which would push more people underwater again, and therefore cause more foreclosures, which would push prices down further, and so onâ€¦ and so on.Â Then people would pull homes off market and scarcity would temporarily push small number of sales at higher prices.Â And as prices went up, investors would pull back, as they have this year.
Are you seeing a pattern here?
The point isâ€¦ weâ€™re essentially running in place.Â The status quo isnâ€™t going to pull us out of this interminable downward spiral, any more than a flat tire will repair itself by continuing to drive on it, even if you stop for air every few miles.
Weâ€™re not doing anything to fix things, so why do so many people find it even remotely plausible that anything would get fixed?Â And the reasons weâ€™re not doing anything to actually fix our housing markets, while many and varied, all come down to the financial types not wanting to leave a nickel on the table, nor allow anyone to have any control over what they do or don’t do.
The EU Central Bank could forgive some of Greeceâ€™s debt, for example, and perhaps the country could start turning itself around, but Central Bankers donâ€™t like to leave any money on the table, so theyâ€™ll only consider reducing what is owed them when theyâ€™re sure thatâ€™s the only optionâ€¦ and they donâ€™t care how many are starving or standing in soup lines by then.
Sounds a lot like Fannie and Freddie on the subject of principal reductions, doesnâ€™t it?
THE POINT ISâ€¦
The point is that itâ€™s been six yearsâ€¦ and then some.Â Six years of preposterous forecasts of a housing recovery being right around the corner.Â Six years of waiting and seeing.Â Six years of â€śweâ€™re at the bottom and coming back strong.â€ť
Even though the fundamentals that caused the meltdownâ€¦ and prevented the recoveryâ€¦ are the same or worse.Â The unemployment picture remains just awfulâ€¦ we just keep pushing people into the â€śstopped lookingâ€ť category in order to push the headline unemployment percentage downâ€¦ otherwise the unemployment percentage would be around 12 percent.Â Median incomes continue to fall, and the jobs we create pay minimum wage and donâ€™t offer health benefits.
And although I canâ€™t say this for sure yetâ€¦ but I will bet anyone that when the numbers finally come out, home sales are down by over 50 percent this yearâ€¦ maybe theyâ€™re already down by even more.Â And that will be shown to have had a huge impact on our GDP.Â If something doesnâ€™t change soonâ€¦ can you say â€śrecession,â€ť boys and girls?
But, donâ€™t worryâ€¦ they wonâ€™t admit anything like that until year-end at the earliest, assuming they ever do.
Weâ€™re buried under trillions in debt.Â The only way we can start growing again is to do something about that situation, but I think itâ€™s clear that banks wonâ€™t do anything to forgive debt until the country is in a deepening recessionâ€¦ or, someone holds a gun to their heads.
And the only â€śgunâ€ť we have might be thought of as the AK-Eminent Domain.Â Itâ€™s the only thing that scares the financial sector.Â Everything less, has been proven to be little more than a fine that can be financed.
So, I interviewed Professor Robert Hockett from Cornell Law, the author of the plan cities are considering that would use eminent domain to write down loans for homeowners.Â I interviewed Tom Deutsch, executive director of the American Securitization Forumâ€¦ and most recently I interviewed Steven Gluckstern, the CEO of Mortgage Resolution Partners in San Francisco.
And from what I hear, the plan will be going forward sooner as opposed to later, but it seems like most homeowners are more interested in the outcome of a court case in Montana.Â Shockingly, some homeowners are even opposed to the use of eminent domain to address the problem of underwater loans.
Honestly, it feels like apathy caused by too many people that havenâ€™t stopped to think about how Richmond, Californiaâ€¦ or any of the other cities considering the planâ€¦ will affect them as individuals.Â It feels like another example of why weâ€™ve lost seven million homes over the last six years without much change and without much fight.
Because weâ€™re not a movementâ€¦ weâ€™re not a causeâ€¦ weâ€™re just a bunch of individuals worried about our own problems as we feel our individual American Dreams slowly slipping further from our grasps, complaining that more isnâ€™t being done, or too much isnâ€™t fair. Â In point of fact, yet another mid-term election is about to come and go without a single politician feeling the need to do anything differently than was done in the past.
So, I went to visit Richmond, California, so I could see what the town looked like, and to sit and talk face to face with the CEO of Mortgage Resolution Partners.Â Join me below and I’ll take you on a short tour of Richmond… the same sort of place where dozens of our cities are headed, and but for the grace of God go us all. Â How many will have been forced to follow such a path before we won’t allow it any longer?
I don’t know, but I fear it’s going to be far too long for my tastes.
Driving into downtown Richmond feels like driving into any small town U.S.A.Â
That flag invites travelers to, “Discover Richmond.”Â
And Richmond’ City Hall looks quite impressive, actually.
Even the Richmond Post Office is historically quaint by today’s standards. Â
Like something you might see on “Murder She Wrote.”
Richmond’s waterfront parks offer breathtaking views of San Francisco across the bay.
The city is roughly 70 percent “black and brown,” which gives the place that ethnic-cool flair.
And many of Richmond’s homes, while not sprawling estates by any means, would certainly be considered clean and well-maintained…. cute, even.
We didn’t have a map of Richmond’s blight with us, of course, and we actually starting to worry that we’d need to find someone who could direct us to some of the vacant homes that the city now wants to take over using eminent domain. Â But, we were worried for nothing, because with a vacancy rate approaching 20 percent, you can find “that” Richmond by turning down any of the city’s streets.
If this were your next-door neighbor, and six years into the foreclosure crisis you were still underwater by 50, 60 or even 70 percent… how long before throwing in the towel and walking away.
Â Richmond’s vacant homes are often dilapidatedÂ to the point of appearing dangerous.
Another one boarded up that doesn’t appear to be changing any time soon.
The home on the left is quite nice, while the one next door looks a little rough.
I can’t even the count the number of vacant homes that have posted “Keep Out” signs.
Boarded up and fenced in. Â Just the sort of site you want to see while taking a walk with your family.
Notice that although these homes are empty… they’re not on the market.
Reportedly, Richmond’s homes are up to 70 percent underwater, six years after the crisis began. Â Hey Zandi? Â Let me guess… next year this place is going to rebound? Â LOL
It’s incredible to consider that on the San Francisco Bay, there some of the most dramatic and expensive real estate in the country… and then there’s Richmond.
Someone should buy this wall and take it to Los Angeles and open a trendy restaurant around it.
I was expecting a San Francisco skyscraper in the city’s financial district, but here’s the headquarters of Mortgage Resolution Partners (“MRP”), the “community advisory firm,” that’s working to help cities adopt the eminent domain plan to combat underwater loans.
MRP is contained in one nice sized room that’s fun and functional, but certainly doesn’t leave you with the impression that any war profiteering going on.
Steven Gluckstern is MRP’s executive chairman, and he seems to spend most of his days talking on the phone to the myriad of people on all different sides of the fight. Â MRP does not plan to profit by the plan’s implementation, the firm only proposes that it will receive the same dollars servicers would receive forÂ successfullyÂ writing down the loans. Â And so what? Â If he manages to save Richmond and places like it, maybe we’ll start to see more in the way of meaningful solutions, and less waiting for a recovery that simply cannot come for decades.
Some still believe that the plan to use eminent domain will get tied up in the courts, but Steven and his partners say they’re ready for whatever the opposition throws at them… and that the plan will move forward sooner than anyone might think. Â
In the weeks ahead, I’ll be back in Richmond to meet with Richmond’sÂ courageousÂ Mayor Gayle McLaughlin… and I have to admit that I’m really looking forward to meeting with the mayor who wouldn’t back down even when threatened by some of Wall Street’s most powerful institutions and even members of Congress, the FHFA and others in governmental agencies who still oppose the plan.
So, when I started looking into what the eminent domain plan was all about, I wasn’t sure that I was entirely in favor of its use for the purpose of writing down loans for homeowners, but after several months of talking to experts on all sides, I think it’s the only gun in the arsenal, as it were. Â And I don’t think there’s any question at this point, that without a gun pointed at them, Wall Streeters aren’t going to open the vault, metaphorically speaking.
Besides, six years is long enough for the servicing industry to have fixes the problems in areas like Richmond… if they cared what was happening to these cities as the result of the financial meltdown and foreclosure crisis, they would have done more to help. Â Obviously, they don’t particularlyÂ care, so maybe it’s time to make them care more.
All homeowners need to start caring more about this issue too. Â Because when push comes to shove, it will be public support that likely ends up pushing the plan over the proverbial finish line.
So, ATTENTION DOERS… If you want to show your support, email Steven Gluckstern at MRP and tell him you’re on his side… and the side of the homeowners of Richmond.
Send your email showing your support to Steven Gluckstern at:Â firstname.lastname@example.org
And let Richmond’s Mayor that you think she’s doing the right thing… she’ll appreciate knowing that… and you can email her directly at:Â McLaughlin@officeofthemayor.net
And for anyone who opposes the plan… answer me this: Â If not eminent domain, what should the Mayor of Richmond do about the unwillingness of the mortgage industry to do more to save cities like Richmond from ending up like Detroit?
Stay tuned… and Carpe Domum! Â (It means: “Seize the House!”)