March 29, 2020

A City Invokes Seizure Laws to Save Homes

Scarcely touched by the nation’s housing recovery and tired of waiting for federal help, Richmond is about to become the first city in the nation to try eminent domain as a way to stop foreclosures.

The results will be closely watched by both Wall Street banks, which have vigorously opposed the use of eminent domain to buy mortgages and reduce homeowner debt, and a host of cities across the country that are considering emulating Richmond.

The banks have warned that such a move will bring down a hail of lawsuits and all but halt mortgage lending in any city with the temerity to try it.

But local officials, frustrated at the lack of large-scale relief from the Obama administration, relatively free of the influence that Wall Street wields in Washington, and faced with fraying neighborhoods and a depleted middle class, are beginning to shrug off those threats.

“We’re not willing to back down on this,” said Gayle McLaughlin, the former schoolteacher who is serving her second term as Richmond’s mayor. “They can put forward as much pressure as they would like but I’m very committed to this program and I’m very committed to the well-being of our neighborhoods.”

Despite rising home prices in many parts of the country, including California, roughly half of all homeowners with mortgages in Richmond are underwater, meaning they owe more — in some cases three or four times as much more — than their home is currently worth. On Monday, the city sent a round of letters to the owners and servicers of the loans, offering to buy 626 underwater loans. In some cases, the homeowner is already behind on the payments. Others are considered to be at risk of default, mainly because home values have fallen so much that the homeowner has little incentive to keep paying.

Many cities, particularly those where minority residents were steered into predatory loans, face a situation similar to that in Richmond, which is largely black and Hispanic. About two dozen other local and state governments, including Newark, Seattle and a handful of cities in California, are looking at the eminent domain strategy, according to a count by Robert Hockett, a Cornell University law professor and one of the plan’s chief proponents. Irvington, N.J., passed a resolution supporting its use in July. North Las Vegas will consider an eminent domain proposal in August, and El Monte, Calif., is poised to act after hearing out the opposition this week.

But the cities face an uphill battle. Some have already backed off, and those that proceed will be challenged in court. After San Bernardino County dropped the idea earlier this year, a network of housing groups and unions began working to win community support and develop nonprofit alternatives to Mortgage Resolution Partners, the firm that is managing the Richmond program.

“Our local electeds can’t do this alone, they need the backup support from their constituents,” said Amy Schur, a campaign director for the national Home Defenders League. “That’s what’s been the game changer in this effort.”

Richmond is offering to buy both current and delinquent loans. To defend against the charge that irresponsible homeowners who used their homes as A.T.M.’s are being helped at the expense of investors, the first pool of 626 loans does not include any homes with large second mortgages, said Steven M. Gluckstern, the chairman of Mortgage Resolution Partners.

The city is offering to buy the loans at what it considers the fair market value. In a hypothetical example, a home mortgaged for $400,000 is now worth $200,000. The city plans to buy the loan for $160,000, or about 80 percent of the value of the home, a discount that factors in the risk of default.

Then, the city would write down the debt to $190,000 and allow the homeowner to refinance at the new amount, probably through a government program. The $30,000 difference goes to the city, the investors who put up the money to buy the loan, closing costs and M.R.P. The homeowner would go from owing twice what the home is worth to having $10,000 in equity.

Alan Blinder contributed reporting.

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Consumers in Many Areas Spent More, Fed Reports

The Fed said five of its regions, Dallas, Kansas City, Minneapolis, San Francisco and St. Louis. reported modest or slight growth in late July and August. The seven other regions described growth as subdued, slow or sluggish.

The survey, known as the beige book, offers mostly anecdotal information on economic conditions. Its findings were a slight improvement from the previous survey, which said growth slowed in eight of the 12 regions in June and early July.

Consumer spending increased in most regions from the previous survey. But the gains were mostly a result of stronger auto sales. Demand for other products was flat or fell in several regions during late July and August.

The report offered little guidance about future hiring. It noted that several districts had said the volatile stock market and economic uncertainty had led many businesses to lower expectations for the near future. The Dow Jones industrial average lost 1,962 points, or roughly 15 percent, from July 22 through Aug. 10.

Although far from upbeat, the overall tone from the anecdotal evidence “wasn’t all doom and gloom,” said Jennifer Lee, senior economist at BMO Capital Markets.

The regional outlook will help shape the discussion at the central bank’s next meeting on Sept. 20-21.

The economy barely grew in the first half of the year, and the government said last week that employers stopped adding jobs in August.

Consumers and businesses are feeling less confident after a turbulent summer. Lawmakers fought over raising the federal borrowing limit, Standard Poor’s downgraded long-term United States debt, and stocks have fluctuated wildly after plunging in late-July and early August.

Manufacturing slowed in many parts of the country, including New York, Philadelphia and Richmond, the survey noted. Textile makers in Richmond said that their markets had grown weaker because of declines in consumer confidence.

Home sales slowed in many districts, although Atlanta, Boston, Dallas and Minneapolis said sales had improved slightly compared to last summer’s weak levels.

Some economists say the Fed must act to help the economy avoid another recession.

On Aug. 9, the Federal Reserve said it planned to keep interest rates very low until at least mid-2013, assuming the economy remained weak. Minutes from that meeting showed some Fed officials had pushed for more aggressive steps.

One possibility is the Fed could increase the percentage of long-term Treasury securities it keeps in its mix of holdings. That approach would have the advantage of exerting downward pressure on long-term interest rates without adding to the Fed’s already record-level of securities.

Still, three regional bank presidents dissented from the Aug. 9 decision. They expressed concerns that the Fed’s policies were contributing to higher inflation.

The worsening jobs outlook has also put pressure on President Obama. He is expected on Thursday to introduce a $300 billion jobs package before a joint session of Congress. The plan is likely to include extensions of the payroll tax cut and long-term unemployment benefits, tax incentives for businesses that hire and money for public works projects.

The effort faces strong opposition from Republicans in Congress, who say Mr. Obama’s previous stimulus program failed.

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