By Jass Stewart and Grace Ross
The worst economic recession in our lives may be turning but it is unquestionably fueled by a mortgage crisis created by unscrupulous, predatory lenders.
Both the short-lived and unregulated mortgage industry and the increasingly unmonitored financial sector created quick money by ginning up property values and enticing consumers regardless of their ability to pay.
Many eligible for conventional mortgages were underwritten into quick pay-off predatory loans with characteristics traditional banks are legally barred from ever underwriting.
With predatory lenders increasingly dominating the market, Massachusetts home prices soared by an unprecedented 90 percent in 7 years.
Anyone buying a home or refinancing after 2002 is a victim of predatory lending. Even conventional mortgages cost many 10s of thousands more because of artificially hiked prices.
This explains why a staggering 50 percent of Brockton homeowners are “underwater”— their home values less than their mortgages. Being underwater is a necessary precursor, and today the best predictor, of foreclosure.
This crisis was caused by deliberate and, in Massachusetts, illegal quick money practices that increase foreclosures later at the expense of American families and local communities.
Foreclosures cost everyone. Before Bush left office, the Republican FDIC chief pointed out that banks lose less by refinancing with principle reduction than by foreclosing.
So why are the largest lenders still choosing foreclosures? This is truly the multi-trillion dollar question.
Tom Deutsch of the American Securitization Forum stated to Congress: “Ultimately, it must be recognized that the seismic economic challenges in the United States, the epicenter of which is the housing market, are too great for purely private sector loan modification solutions.”
Deutsch, representing an industry holding about 30 percent of mortgages, advocated for government intervention. The Brockton City Council is doing just that by voting for a multi-sector working group to study the use of eminent domain to seize securitized, underwater loans. One option would mean no financial cost to the city—funded by private investors seeking the best way to recovery by stabilizing housing values.
The Enterprise in its opinion piece, “City should foreclose on eminent domain idea,” inaccurately portrayed eminent domain’s purpose as seizing private property exclusively “for a park or highway.” The understood standard for exercising eminent domain is for an identified public purpose of any kind.
As a city ravaged by foreclosure, Brockton could have no greater “public purpose” than stabilizing its housing market.
Without any say by voters, the megabanks and biggest financial players received $7.77 trillion in taxpayer bailouts—arguably the biggest ever public investment. These players are already deeply in the public domain.
And with little meaningful federal intervention, the hardest hit cities must lead to survive. Worcester passed the first cash bond ordinance in 2009; Springfield the first Massachusetts pre-foreclosure mediation law in 2011.
As Brockton’s CFO stated at the December 17th hearing, Brockton cannot afford to wait 20 or 30 years for a recovery. As the most impacted city in Massachusetts, Brockton leaders may need to move first on this initiative if it’s viable.
Massachusetts’ SJC ruled early on that mortgages doomed to fail are illegal. Two national settlements addressed illegalities like robosigning which remain the industry’s standard procedures.
These mortgages and their consecutive owners are in tricky territory on any blanket assumption of having “legitimately acquired” them. And more legal issues are adjudicated in the favor of homeowners every few weeks.
Most importantly, eminent domain purchases property or debt at present day value. It removes the historic and baseless overpricing.
If proved doable, this effort will predominantly arrest the downward slide and make today’s values a floor to dropping property values—benefiting everyone, keeping many more Brockton residents affordably in their homes and leaving them with real spending power to shore-up the local economy.
Clearly, after a 5-year-old recession, with 7,000 Brockton families underwater, and projections of the housing recovery more than 20 years away, the suggestion that the city “foreclose on [the] eminent domain idea” before it’s even studied would be a step in the wrong direction.
Jass Stewart is a city councilor at large in Brockton. He can be reached at Jass@JassStewart.com. Grace Ross is the coordinator of the Massachusetts Association Against Predatory Lending.