Wednesday, November 13, 2013

Should Southbridge Help People Save Their Homes?

Ken O’Brien

Based upon a quick search I found between 85 and 92 foreclosed properties currently for sale in Southbridge.

I was prompted to undertake the inquiry by a recent email I received from Town Councilor Amelia Peloquin. She was seeking my views on a program that has been undertaken by the community of Richmond, CA. 

Granted that Richmond faced a problem that makes Southbridge pale by comparison. There a staggering 46 percent of homes are “underwater,” meaning borrowers owe more on the mortgage than the house is worth.

In response to this crisis a new strategy emerged to keep foreclosure victims in their homes: Seize their mortgages through eminent domain-- and write them new loans. 

Richmond Mayor Gayle McLaughlin became the first U.S. mayor to take steps to use eminent domain authority — seizing mortgages from the lien holder and selling them back to the homeowner at an affordable rate, giving them the principal reduction that will allow them to stay in their home over the long term.

Other cities have flirted with the controversial strategy, which uses capital funding from a for-profit private investment firm called Mortgage Resolution Partners, but Richmond has actually made purchase offers on
624 loans. The servicers had until August 13 to agree to the heavily discounted price, which MRP and Richmond determined through a third-party appraiser. However no one agreed to the terms, and so Mayor McLaughlin went  back to the City Council to get approval to begin the eminent domain process. Other cities are watching, seeing if this can be a national model.

In a preemptive move a number of lien holders filed suit in Federal Court to block the plan. As the Wall Street Journal reported on August 7:

Banks representing some of the nation’s largest bond investors filed suit against the city of Richmond,
Calif., on Wednesday to block plans by city officials to seize and buy mortgages using their powers of eminent domain.
The lawsuit, filed in federal court in San Francisco, could serve as a key test for whether a city can move forward with such a strategy, which would allow it to forcibly buy mortgages from investors at a price potentially below the property’s current market value. The city would then reduce the loan balance and refinance the mortgage, resulting in a lower mortgage payment for the borrower. The aim is to help struggling homeowners avoid foreclosure….
Legal advocates of the eminent-domain plan have said that constitutional challenges aren’t likely to hold up in court. The loan strategy wouldn’t burden interstate commerce “because it doesn’t prevent credit from flowing in any particular way,” said Robert Hockett, a Cornell University law professor who advocates for using eminent domain to seize underwater mortgages.
“This is a bluff,” said Mr. Hockett. “It’s meant to scare city officials into saying, ‘Oh, who are we to argue with the big guns.’ “

If the objective is really to benefit communities through local principal reduction schemes, instead of using the eminent domain power they can simply buy the mortgages outright.

Here in Massachusetts one financial intermediary has been able to make this work on a small scale. Boston Community Capital, a nonprofit, launched what it calls the Stabilizing Urban Neighborhoods (SUN) Initiative in 2009.

The SUN Initiative targets borrowers in default or foreclosure rather than current underwater loans, working with the lender to buy out the mortgage and then refinancing the borrower with an affordable payment.

Speaking in Salon Magazine Elyse Cherry, CEO and president of Boston Community Capital, said, “We said to lenders, look, you’ve got a mortgage at a bubble price, we’ll pay you the market price and keep the homeowner in the home. Rather than destabilizing neighborhoods, work with us.”

Through the SUN initiative, the firm has been able to purchase 270 mortgages in the Boston area, raising the capital through individuals and foundations, as well as borrowing. On average, the homeowner winds up with a principal reduction of around 40 percent, financing at a 6.375 percent interest rate. While this is higher than the average mortgage rate, the homeowners they work with, either in default or foreclosure would have no opportunity to get credit otherwise. The new, affordable mortgage allows the homeowner to clean up their credit score and rebuild equity, ultimately enabling them to refinance into a lower interest rate and save even more money. In the four years of the program, just one of the 270 mortgages has landed back into foreclosure, and the default rate on such refinancing is a low 2 percent.

The program’s success has enabled Boston Community Capital to use the secondary mortgage market to raise $35 million to purchase more loans. BCC plans to expand into Maryland, where a second foreclosure wave has been rising over the past year. 

The question that lingers is whether a community like Southbridge should adopt either of these approaches, a third path or should matters be left to the vagaries of the “free market”?


  1. The Alliance of Californians for Community Empowerment has put out a model resolution for the Richmond plan:
    PART I
    WHEREAS the economic crisis caused by the big Wall Street banks has devastated our communities: Nearly five million families have lost their homes to foreclosure; nine million Americans have lost their jobs; 10 million families now owe more on their mortgages than their homes are worth; and state and local governments that have seen their property and sales tax receipts plummet are facing crippling budget crises;

    WHEREAS foreclosures harm all homeowners and erode the property tax base: The foreclosure crisis has caused a ripple effect where each new foreclosure brings another distressed property on the market, pushing prices lower, and harming the value of all homes within a neighborhood. It is estimated that homes in foreclosure experience a 22% decline in value, but the impact to foreclosed properties themselves is just the tip of the iceberg. It is conservatively estimated that each foreclosed property will cause the value of neighboring homes within an eighth of a mile to drop 0.9%. As housing values decline, property tax revenues decline as well and in turn increase budget deficits and force cuts to services and jobs that support communities;

    WHEREAS resetting mortgages on underwater homes to fair market value to fix the housing crisis is critical to our economic recovery and creating jobs: The overhang of underwater mortgage debt is one of the primary drags on economic recovery. Underwater homeowners owe nearly $1 trillion more on their mortgages than their homes are worth, money that would otherwise go into our economy in the form of consumer spending. More and more economists are saying resetting mortgages is the best way to stabilize the housing market, which is critical for a strong economic recovery. Resetting mortgages on underwater homes to fair market value would reduce foreclosures and stabilize the real estate market to create revenue and jobs in our city and nationally;

    WHEREAS underwater mortgages are at significantly greater risk of going into foreclosure: Research shows that homeowners who are severely underwater on their mortgages are 150% to 200% more likely to default on their mortgages;

    WHEREAS the foreclosure prevention efforts that have been implemented thus far at the local, state, or federal levels have failed to adequately address the crisis;

    WHEREAS the City of Richmond, California is boldly advancing a Local Principal Reduction program to acquire underwater mortgages in private label securities at their current market values and then refinance the homeowners into new loans with reduced principal in order to bring their mortgages in line with current market values.
    WHEREAS the City of Richmond is offering to purchase the loans at fair market value, but may consider using eminent domain to acquire the loans if its offers are not accepted;
    WHEREAS the City of Richmond would pay fair market value to the investors of the underwater mortgages even if it used eminent domain to acquire them;

    1. PART II
      WHEREAS the City of Richmond’s use of eminent domain to acquire underwater mortgages would serve the public purpose of preventing blight and preserving the community and tax base;
      WHEREAS Wall Street banks and the financial industry’s leadership have chosen to threaten the City of Richmond and other cities who are working on this innovative program with retribution if they move forward with their plans in an effort to bully local communities into backing off from utilizing the legal mechanisms at their disposal to address the crisis and to prevent further devastation;

      Therefore Be It RESOLVED __________ (City or other entity) stands united with the Mayor and City Councilmembers of Richmond and any other city or community that attempts to utilize similar lawful methods at their disposal as they work to save homes and save neighborhoods. Further, we call on Wall Street banks, the Securities Industry and Financial Markets Association (SIFMA), and the Federal Housing Finance Administration which oversees Fannie Mae and Freddie Mac, to stop threatening our communities with reprisals and litigation and instead work with them to negotiate principal reduction for underwater mortgages to current market values in order to the stop the housing crisis, strengthen local economies and help keep families in their homes.

      [and, if the timing is right]

      Also, Be it RESOLVED, we will explore how a Local Principal Reduction program similar to the one being implemented by the City of Richmond could work here in _____________________[City]. We instruct staff to bring back to Council within no more than 30 days a brief report on what this program would look like in our city, including an analysis of the number of loans that might qualify, an estimate of the average benefit to borrowers and the attendant economic benefit, as well as the names of potential funding partners available for the city to work with.


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