A few days ago, MSNBC reported on a partnership between Mortgage Resolution Partners (MRP) and several California local governments that would aide in the solution of the persistent housing crisis. San Bernardino and its neighboring cities have set up a joint authority that would use the power of eminent domain to forcibly purchase distressed mortgages. Rather than evict homeowners through foreclosure, the public-private entity would offer residents fresh mortgages with reduced debts. Tom Braithwaite, who also covered this story for The Financial Times writes,
If rolled out nationwide, the biggest losers could be the largest US banks, who hold loans on their books at more than their current face value. People involved with the plan believe it could be disastrous for big mortgage lenders like Bank of America.
MRP is paying for the program by soliciting institutional investors, who will be repaid when local governments re-sell the modified loans to long term lenders. The first targeted group of loans for the program is made up of 5,000 mortgages with debts totaling near $740M. Because they are buying in bulk, we speculate that local governments will likely be able to purchase mortgages for deep discounts that they will then be able to pass on to individual homeowners. This is a creative means of intervening in the foreclosure crisis by allowing a local government to work as an interim note holder (ahem, interim facility) to stabilize financially distressed housing stock.
The program has not yet been given the green light, and there is plenty of reason to suspect it might not get off the ground. Bank of America and other large mortgage lenders are powerful lobbyists. And the use of eminent domain is endlessly controversial in the United States, where we tend to be sensitive to government encroaching on our near-sacred right of property ownership.
But as controversial as it is, the practice of forcibly taking over distressed properties is embedded into the history of New York City affordable housing. It is through eminent domain law that many cities, including New York, were able to carry out the large scale “slum clearance” programs that characterized urban renewal era housing. It is also is typically used to clear land for large scale public works projects — if you read yesterday’s post, Atlantic Yards and Willet’s Point are both examples of this.
New York City has also directed a takeover of distressed housing without invoking eminent domain law at all, through the Third Party Transfer program. Third Party Transfer allows the city to foreclose on outstanding property taxes and subsequently transfer title of tax delinquent residential properties to responsible developers (or building residents themselves.)
All in all, we believe that there is great opportunity in New York City for a program similar to that being implemented in California. Much of the infrastructure is already in place, including the quasi-public non-profit Neighborhood Restore that administers TPT and would be a logical body to run a mortgage program such as this. Of course, it would look different in our world: mortgage modifications would be intended for new, responsible developers rather than the original owners. But the California model is an exciting idea that could potentially stabilize massive amounts of housing stock for struggling homeowners. We’re excited to watch it play out – and, hopefully, to bring something similar here.