Local governments have long used eminent domain as a mechanism for taking public property for public purposes. Now some country governments are considering using the same legal strategy to “take” underwater mortgages from lenders in order to help struggling borrowers avoid foreclosure.
Mortgage Resolution Partners, a California-based venture capital firm, floated the idea recently, as a low-cost way to address the collateral damage to communities (loss of tax revenue, abandoned property and blighted neighborhoods) of the ongoing foreclosure crisis.
Eminent domain allows local, state, or federal government entities to take private property, provided they use it for “public purposes” and pay the owners fair market value for it. Supporters of the plan say its public purpose (helping communities) is clear and the fair market value of mortgages could be determined easily through auctions and comparable sales. San Bernardino County and its two largest cities (Fontana and Ontario) have approved resolutions authorizing them to acquire underwater mortgages but have not as yet taken steps to implement the plan.
The basic idea is straightforward: Governmental entities would ‘seize’ underwater mortgages on which the borrowers are still current, pay the mortgage owners ‘fair market value’ based on current, lower values, and then restructure the loans to produce lower payments and lower principal balances for borrowers.
Supporters say this strategy benefits everyone: Borrowers end up with loans they can afford, cities and towns boost their tax rolls and avoid the negatives of foreclosed properties and investors shed high-risk assets. But financial institutions that own second liens behind the first mortgages targeted for taking would not be among the winners, because they would have to recognize losses they have thus far been able to hide by refusing to restructure them to reflect depressed home values.
The opposition of second lien holders has been a major impediment to government assistance plans that call for lenders to restructure loans by reducing the principal balance. If the second mortgage isn’t also restructured, the net effect is often to increase the collateral backing the second mortgage, leaving the borrower still underwater on the debt.
Financial industry trade groups are arguing that using eminent domain to take mortgages would be unconstitutional and warning that lenders would increase mortgage interest rates and tighten underwriting standards in response.
"Eminent domain is not the right mechanism to address these problems," Timothy Cameron, managing director of the Securities Industry and Financial Markets Association's asset managers group, told California officials at a recent meeting. "There are better ways to attack these problems," he argued, adding, “We need mortgage investors and lenders to come back to these fragile markets – but this plan will force both groups to avoid them….The use of eminent domain will do more harm than good.”
Steven Gluckstern, chairman of the company that proposed the eminent domain plan, says it will do what private investors have been unable or unwilling to do thus far – resolve the foreclosure crisis. We’re now six years into the crisis and public and private entities have not been able to solve it,” he said in a recent press interview. “This is a balance sheet problem for homeowners,” he added, “and if you want to fix the economy, you have to fix this problem.”
The CFPB has spent most of its time developing regulations, but the agency recently delivered a strong reminder that it is charged with enforcing them as well, in the form of a $210 million enforcement action leveled against Capital One, one of the nation’s largest banks.
The newly created consumer watchdog charged the bank with using misleading tactics to sell credit card customers “add-on” products they either did not want or could not use, primarily identify theft protection and payment protection, promising to waive debts for card holders who become disabled, lose their jobs or die. The order said telemarketers offered misrepresented the product’s features, offered them to customers who weren’t eligible for them, and in some cases “forced” the products on customers who hadn’t ordered them.
While neither contesting nor accepting the findings, Capital One officials acknowledged that outside telemarketing firms “did not always adhere to company sales scripts." Nonetheless, Ryan Schneider, the president for credit cards, said the company was “accountable for the actions that vendors take on our behalf."
CFPB Director Richard Cordray said the marketing practices targeted in the enforcement order against Capital One “are not unique to a single institution. We expect announcements about other institutions as our ongoing work continues.” Cordray also made it clear that the agency’s enforcement actions generally will continue “more steadily.”
Capital One has been accused of unfair practices in the past, most recently by the Office of the Comptroller of the Currency, which ordered the company to reimburse customers for unfair billing practices (charging them for products they didn’t order or didn’t use) covering a more than a decade.
Earlier this year, the attorneys general of Mississippi and Virginia sued Capital One in separate actions for deceptive marketing of payment protection plans. The Federal Reserve also noted consumer complaints in approving Capital One’s acquisition of ING, ordering the bank, as a condition of that approval, to strengthen internal controls in its lending and debt collection divisions.
PAYDAY FOR LENDERS
Payday loans are continuing to generate bad publicity and outsized profits for the companies providing them.
A recent study by the Pew found that more than 12 million Americans take out an average of 8 payday loans per year, often accumulating interest and fees exceeding the amount they borrow.
Attractive because of their minimal underwriting requirements, the loans are marketed as a solution to short-term, emergency financing needs. But the study found that most borrowers (69 percent) use the loans to cover daily living expenses (housing costs, credit card or utility expenses); only 16 percent use them for emergencies.
"Millions have turned to payday lenders when finances are tight, finding fast relief but struggling for months to repay loans," according to the study, which found that most borrowers still have an outstanding balance five months after obtaining them. A borrower who obtained a $375 loan and renewed it 8 times would end up paying an average of $520 in fees or interest charges on top of the principal balance, the study found.
Echoing the findings of previous studies, the Pew report also found that the majority of payday borrowers are minorities, have low incomes and do not have college degrees.
The Consumer Financial Protection Bureau has regulatory authority over payday lenders, and CFPB Director Richard Cordray has said examining the industry’s practices will be one of the agency’s priorities this year.
LOST OR DELAYED?
Housing economist Robert Shiller thinks the recession has created a “lost decade” for housing, with many first-time buyers unable to realize their homeownership dreams. Other analysts think homeownership dreams have simply been misplaced but will be renewed as the economy improves.
Robert Shiller, co-founder of the Case-Shiller home price index, sees a combination of prolonged slow growth and a heavy student loan debt burden combining to keep would-be buyers out of the housing market for many years to come.
Analysts reporting signs of a housing recovery “are the devastating downturn are "underestimating tectonic shifts in the U.S. economy that make the housing market a different place from a decade ago," Shiller told If his assumptions are correct, Shiller said, it is likely that home prices won’t rebound for another generation.
Some recent studies have confirmed that grim forecast. A study by the John Burns Real Estate Consulting firm found that the number of first-time buyers has plummeted by 20 percent since 2008 ad predicts that this figure will continue to decline for another three years before beginning to stabilize.
The fear of those who see the decline in homeownership as a long-term trend is that young consumers who lack the capacity to purchase homes now will lose the desire for homeownership in the future. But other analysts contend that the desire for homeownership is as strong as ever.
“This is purely an economic phenomenon, not a behavioral one,” Ben Sopranzetti, a professor at Rutgers Business School, told Business Week “What we need is job growth,” he said. The problem, Sopranzetti agrees, is that job creation has been and is likely to be painfully slow.
Older workers are delaying retirement, limiting opportunities for younger workers; student loan debts are making it difficult for many to accumulate a down payment and tight underwriting standards are making it hard for them to qualify for mortgages. As a result, Sopranzetti said, “It could be years before the conditions are right for many of these young consumers to buy homes, even if they’re inclined to do so.”
Most analysts agree that the housing market will rebound eventually, because Millenials – between the ages of 18 and 35 now – will become more interested in settling down as they get older. But homeownership trends will be driven not by their demand for housing but by their “effective demand,” – their ability to purchase it.
There is no question that Millenials will want to “settle down” as they get older, Joel Kotkin, who writes on real estate trends and social issues, told Business Week. “The key thing is, will the economy be so crappy that the Millennials will never be able to afford a house?”
Loan origination fraud is declining, which counts as good news. But it is being replaced by ‘distressed homeowner fraud’ in the tally of fraud related suspicions lenders are reporting.
Loan origination fraud has traditionally dominated the Suspicious Activity Reports (SARs) lenders are required to submit to federal regulators, but the FBI’s “Financial Crimes Report to the Public” reports that ‘distressed homeowner fraud’ – scams promising aid to homeowners facing foreclosure –“ has displaced loan origination fraud as the number one mortgage fraud threat in many offices.”
These scams take many forms, federal law enforcement officials noted in a recent press release. “Some scammers ask the homeowners to transfer title to their property, make mortgage payments to someone other than the lender, or stop making mortgage payments altogether. Others use false filings in the U.S. Bankruptcy Courts to temporarily stop the foreclosure process, while still others create websites containing false government logos and bold promises to avoid foreclosure in order to deceive the at-risk homeowner. Unfortunately, these fraudsters take the homeowner’s money and any remaining equity in the house and run, leaving the homeowner penniless and more likely to be foreclosed.”
As part of a joint effort to combat mortgage fraud, federal and state regulators, through the Financial Fraud Enforcement Task Force, are sponsoring a series of summits to educate consumers about the risks and to help them protect themselves. “It’s more important than ever that we arm homeowners with the information they need to recognize the predators up front and empower them to avoid falling victim to these devastating scams,” Michael Bresnick, executive director of the task force ,said in a press statement announcing the summits. The summits will be held in Nevada, Florida and California, the states with the largest number of mortgage-fraud-related suspicious activity reports.