In California, Richmond Mayor Gayle McLaughlin and Mortgage Resolution Partners are looking to seize underwater home loans through the use of eminent domain, and the legal battles are underway. A lawsuit by BlackRock and other bondholders to stop Richmond was tossed recently on the grounds that it was premature. City council members still need to vote on whether to move forward to let the state court seize the loans.
There is no question the legal battles from bondholders and possibly the federal government will continue if Richmond moves forward with this plan. Proponents of it argue that it will prevent foreclosures and blight. While those are worthy aspirations, there are a few problems with the argument. These loans, although underwater, will be performing loans. They are not seizing loans that are delinquent. The homeowners are underwater, but perhaps not technically distressed since they are current on the loan.
The motive is hardly altruism. Mortgage Resolution Partners stands to make money promoting the eminent domain strategy in Richmond and other cities. There’s nothing wrong with making money, but perhaps Mortgage Resolution Partners should not hide behind altruistic motives. Ultimately, if this effort is not stopped in the courts, the people who pay the real price will be future homeowners in Richmond.
The Federal Housing Finance Agency (FHFA) has already made it clear that the agency disapproves of this strategy and has stated that it may remove future government guarantees of mortgages in cities that exercise the Mortgage Resolution Partners strategy. If FHFA follows through on this threat it would make purchasing a home for the average Richmond resident extremely difficult.
So the question before the city council is simple: Is the Mortgage Resolution Partners strategy a progressive and altruistic attempt to serve the community, or a housing suicide pact that will damage potential resident homebuyers for many years to come?
More Housing Proposals on the Way in Congress
To put the housing reform debate in context, let me start with a quote from a September Wall Street Journal Article:
“In a 2011 meeting with the president, then-White House economist Austan Goolsbee compared Fannie and Freddie with comic-book villains that had been captured and imprisoned in a cell on the ocean floor. It would be folly, he said, to turn the companies loose because they promised to behave. ‘If Fannie and Freddie are allowed to return to their old business model, then shame on us as a nation,’ said Mr. Goolsbee, who left the administration in 2011, in a recent interview.”
So far, housing reform has centered on two pieces of legislation. The House bill, sponsored by Jeb Hensarling, would end virtually all government backing of the housing market. The Senate bill, a joint effort by Republican Bob Corker and Democrat Mark Warner, would increase private capital in the market over time and perhaps be a more cautious approach.
A flurry of new legislation is expected in the fall in Congress as hearings continue. House Democrat John Carney seeks to introduce a House version of the Corker-Warner bill. Carney should get some Republican interest in the bill, but probably not enough to threaten the Hensarling legislation as the lead House bill. House Financial Services Committee Ranking Member Maxine Waters is also expected to introduce legislation, seen by most analysts including myself as dead on arrival.
The Senate will get more interesting this fall when Banking Committee Chairman Tim Johnson and Ranking Member Mike Crapo introduce their legislation. The Corker-Warner bill has been fairly well-received, so it will be interesting to see how close the Johnson-Crapo bill is to the Corker-Warner plan. Ultimately, legislation that injects more private capital into the housing market, unwinds Fannie and Freddie, and preserves some government guarantees so the 30-year fixed mortgage can still be offered will win the day. But we are still many hearings and votes away from that day.