Wall Street’s war on Richmond
reports on a plan by Richmond, Calif., officials to help homeowners underwater on their mortgages--and the opposition they face from Wall Street.
ROBERT AND Patricia Castillo were having more and more difficulties renting. Their son suffered from autism, and landlords were less than sympathetic after his outbursts. So they decided to buy--and found a three bedroom, one bathroom house in Richmond, Calif. The price tag was $420,000, but that was what everyone was paying back then.
Today, though, five years after the real estate market went into free fall as the Great Recession started in earnest, the Castillos' house is worth just $125,000. "We're in a bad situation," Robert Castillo told the New York Times. "Not just me and my family, but the whole of Richmond."
The Castillos' experience is all too common in Richmond, where home prices have declined 43 percent since 2007, and 47 percent of homes are "underwater," according to the real estate firm Zillow.com--meaning homeowners owe more on their mortgage loan their their homes are worth.
In July, Richmond announced an innovative plan to address this crisis by writing down home loans to market values--using the policy of "eminent domain" that is normally the preserve of real estate specualators.
Led by Green Party Mayor Gayle McLaughlin, the city announced that it would take over loans from mortgage companies and write them down to current market value, making mortgages affordable for homeowners who are underwater. "The banks sold our community predatory loans, and now they have no solution that they're presenting for this crisis," McLaughlin told Democracy Now!. "So we are stepping in to fix the situation."
But Wall Street isn't happy with the Richmond plan. Banks and investment firms, together with the federal government, have launched an all-out offensive to derail the plan to write down loans. And now, battle lines are being drawn inside City Hall itself, as conservative City Council members pushing to withdraw the proposal will be squaring off against a coalition of progressive groups in the city.
RICHMOND CITY officials started out by sending letters to mortgage companies seeking to buy 624 home where the amount owed is more than the value of the house. Instead of offering the full amount owed, the city is offering about 80 percent of current value--what it is estimates is fair market value when adjusting for the increased risk of default by homeowners struggling with underwater loans.
If the mortgage companies refuse the offer, the city is threatening to use eminent domain--the seizure of private property (in this case, the loan) for a public purpose--to take over the obligation. The city, backed by capital from Mortgage Resolution Partners (MRP), a private investment firm, would then write down the loans to homeowners at fair market value, while MRP would earn a commission on each loan.
Eminent domain has traditionally been a tool of the wealthy and powerful to displace poor and minority communities by destroying their housing to build freeways or shopping malls. But with the possibility that it could be used to stabilize working-class communities by lowering loan payments for homeowners, a who's who of giant Wall Street investors and banks is doing everything it can to make sure Richmond doesn't set an example for the rest of the country.
Banking behemoths Wells Fargo and Deutsche Bank--which are representing some of the nation's largest bond investors, including Fannie Mae and Freddie Mac, BlackRock Inc., DoubleLine Capital LP and Pacific Investment Management Co.--have filed a lawsuit against the city.
Wall Street's attacks on Richmond aren't just limited to the courtroom. They also involve what can only be described as financial sabotage. In August, the city was unable to find a buyer to refinance its highly rated municipal bonds, costing the city $4 million in lost savings. Earlier in the week, the bond rating agency Standard & Poor's said it would probably lower ratings for cities that used eminent domain in the way Richmond is considering.
Bonds are an important mechanism for cities to finance their day-to-day operations and pay for projects like schools, roads and utilities. In the long run, an inability to purchase bonds could have a significant impact.
Shamefully, the federal government is piling on as well. The Federal Housing Finance Agency (FHFA) announced in early August that it would direct Fannie Mae and Freddie Mac, which it oversees, to "limit, restrict or cease business activities" in any municipality using eminent domain to seize mortgages.
Because Fannie Mae and Freddie Mac own or guarantee 90 percent of all new mortgages issued in the U.S., such a move would severely restrict homebuyers' ability to finance real estate purchases in Richmond or anywhere else that decided to use eminent domain to write down underwater loans.
Threats to withdraw lending in a disproportionately minority community amount to redlining--a reversion to the overtly racist housing practices of pre-civil rights America.
Unfortunately, these threats and lawsuits have strengthened the hand of more conservative Richmond city officials. City Council member Nat Bates said he plans to introduce a motion at the council's September 10 meeting that would withdraw the city's offer to purchase underwater mortgages and require that any future offers receive council approval. "We need to get back in good graces with financial institutions," he told the San Francisco Chronicle.
But it is precisely the policy of staying in good graces with financial institutions that has failed homeowners since the onset of the financial mess, said David Sharples, an organizer with the Contra Costa chapter of Alliance of Californians for Community Empowerment (ACCE). "The big banks and the federal government have not done what they should have in terms of solving the underwater crisis. That's why we're pushing for this solution for underwater homeowners."
HAD THE federal government sought "principal reduction"--writing down the value of mortgages for struggling homeowners--there would be no need to pursue eminent domain as a local solution now.
Instead, the Obama administration put trillions of dollars at the command of banks to bail them out during the depths of the financial crisis--and asked almost nothing in return. Even short nationalizing the banks, Obama could have required these parasites to make real help available to homeowners, as a condition of bailing them out. Instead, he unveiled the bank-friendly Home Affordable Modification Program (HAMP), which was hard to qualify for, and focused on interest rate, rather than principal reduction.
Although 860,000 people received loan modifications through HAMP, a shocking number of homeowners who qualified have defaulted on their loans since then.
According to an analysis by the Inspector General of the Troubled Asset Relief Program (TARP), 46 percent of permanent modifications from the third quarter of 2009 have re-defaulted, and re-default rates in 2010 ranged from 28 to 37 percent. While homeowners in the successor program, the Home Affordable Refinance Program (HARP), seem to have fared better, the Obama administration's response has been too little, too late.
Since the onset of the financial crisis in 2007, 4.5 million homes have been lost to foreclosure, displacing 10 million people. Not only has this been devastating to the people directly affected, it has had lasting effects on surrounding communities, leading to blight and depreciating property values, which mostly affect the wealth of working-class people and communities of color.
The fact that Black Americans have lost more wealth in the last decade than in any era since Reconstruction in the 19th century is a direct result of the housing crisis. Today, we are seeing a rebound in the housing market, yet 24 percent of mortgage loans remain underwater, and the numbers are the worst in hardest-hit communities.
The fight for Richmond, then, is about who should be made to pay for the mortgage mess: The banks and mortgage speculators who caused the financial meltdown when they made predatory loans, bundled them into risky securities, and then gambled on them on the stock market? Or working-class communities and communities of color who have been bearing the brunt of the crisis for six years?
The financial barons seemingly have the money, power and control over the system to force Richmond to back down. Richmond is not the first local government to consider the idea of using eminent domain as a tool to combat the mortgage crisis. MRP first brought a similar plan to San Bernardino County, in Southern California, but the county quickly backpedaled in the face of the backlash from Wall Street.
What's different in Richmond is the community outreach and activism that gives city officials political support to act. ACCE and other groups organized a town hall meeting of more than 100 people, and three press conferences with more than 50 people at each ne. Mayor McLaughlin also joined ACCE members across the Bay in San Francisco for a rally in front of Wells Fargo corporate headquarters to demand that the banksters drop their lawsuit and accept the city's offer to purchase underwater loans.
For Richmond to win, it cannot stand alone. Housing justice activists all over California and all over the country need to mobilize to put pressure on their elected officials to stand with Richmond, and to consider eminent domain as a tool to writing down mortgages.
If the city of Richmond succeeds in reducing the balance on mortgages for struggling homeowners, it will send a message that housing policy should meet the needs of our communities, not the needs of the banks. To succeed, they will need our solidarity.