Tag Archives: mortgage industry

Municipalities and Wall Street argue over using eminent domain to stop foreclosures

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Some municipalities are considering using eminent domain to slow foreclosures – and Wall Street and those in real estate are not happy:

On Saturday, Mayor Wayne Smith of Irvington, N.J., will announce that his mostly working-class city is proceeding with a legal study of the plan. Irvington could try to head off legal action and repercussions through what are called “friendly condemnations,” in which incentives are used to persuade the owner to drop any objections, he said. “We figure if this program works it can help anywhere from 500 to 1,000 homes.”

This summer the similarly working-class city of Richmond, Calif., in a heavily industrial part of the San Francisco Bay Area, became the first to identify homes worth far less than their owners owe, and offer to buy not the houses themselves, but the mortgages. The city intends to reduce the debt on those mortgages, saying that will prevent foreclosure, blight and falling property values. If the owners of the mortgages — mostly banks and investors — balk, the letters said, the city could use eminent domain to condemn and buy them.

Since then, intense pressure from Wall Street and real estate interests, including warnings that mortgages will become difficult or impossible for Richmond residents to get, has whittled away support for the plan. The city has yet to actually use its power of eminent domain, but it is already fighting two lawsuits filed in federal courts…

Opponents of the strategy, including the institutional investors BlackRock and Pimco, Wells Fargo and the Mortgage Bankers Association, say that taking mortgages by eminent domain is a breach of individual rights and that investors will not receive fair market value for the mortgages. In Richmond, Mayor Gayle McLaughlin has asked investors to come to the table to work out a price, but they have so far declined to negotiate.

An interesting convergence of rights. Typically, eminent domain usage tends to raise the ire of citizens but this article makes it sound like this is something residents want. Is this the case? One argument often leveled against eminent domain is that allowing another case gives governments more opportunity to do what they want when they want. However, with this strategy, the municipalities are trying to work for the residents and against larger entities.

I wonder if the only thing that would convince banks and mortgage holders to consider this would be bad publicity, something along the lines: “Those Wall Street banks want to take advantage of distressed communities and are unwilling to work with them to improve their neighborhoods or help their residents.” This would involve less of a legal strategy and more of a public relations strategy.

 

15 of 20 biggest mortgage originators in 2006 no longer in business

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Here is one of the consequences of the economic crisis: three-quarters of the biggest mortgage originators in 2006 are no longer operating.

Only five of the 20 biggest mortgage originators from 2006 are still around independently today. The rest either filed for bankruptcy or got bought as the mortgage market imploded in 2007 and 2008, as the table below from SNL Financial shows.

This is what capitalism looks like, kind of. Lenders that weren’t too big to fail did fail, and then got scooped up for what buyers thought were bargain basement prices — or in Countrywide’s case, managed to market themselves before the market completely collapsed.

The chart is pretty fascinating. Firms that were powerful and active not too long ago, including Countryside Home Loans, Washington Mutual Bank, Wachovia Mortgage FSB, and Countrywide Bank FSB, are no longer operating. Granted, some of these companies were acquired by other corporations but these were large firms in their own right and some were at the top in terms of market share.

My quick takeaway: business fields can change rapidly.

Federal government looking into redlining practices

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During the economic crisis of recent years, mortgages have been more difficult to obtain for many compared to what was available in the mid 2000s. With these tighter lending practices, the US government is looking deeper into possible redlining practices by lenders:

At the Justice Dept., a new 20-person unit dedicated to fair lending issues received a record number of discrimination referrals from regulators in 2010 and has dozens of open cases, according to a recent agency report. Potential penalties can reach into the millions of dollars. “We are using every tool in our arsenal to combat lending discrimination,” Thomas E. Perez, the assistant attorney general for the Civil Rights Div., told a conference of community development advocates in Washington in April.

To some banks the crackdown has come as a surprise, say consultants and lawyers representing financial institutions in discussions with regulators. Like Midwest BankCentre, some lenders are being cited for failing to operate in minority and low-income census tracts near their branches, even when they have never done business there before. “If you put your branches only in upper-income areas, the regulators are not accepting that anymore,” says Warren W. Traiger, a lawyer at BuckleySandler in New York, which advises banks on fair lending issues.

Mortgage refinancing activity doubled in white neighborhoods but dropped sharply in minority neighborhoods in a sample of major U.S. cities in 2008 and 2009, according to Paying More for the American Dream, an April study by a group of seven community development nonprofits. “The pendulum has swung back too far the other way,” says Kevin Stein, associate director of the California Reinvestment Coalition in San Francisco, one of the report’s authors.

Several things strike me as interesting about this:

1. As the article notes, this oversight goes back to the 1977 Community Reinvestment Act (CRA). I wonder how the HMDA data, data lenders must report every time someone applies for a mortgage (including factors like race), has been a part of these government efforts. With this data, regulators (and others) can get an idea of who lenders approve for loans and who they do not.

2. The Drudge Report headline about this article,  “Obama admin pushing banks to offer subprimes again…,” seems somewhat misleading. There is little to indicate in this article that the government is telling lenders they should make subprime loans. Rather, it sounds like the government is suggesting that lenders need to make their products available to all people. One adaptation to this in order to account for worse credit scores or other factors might be for the lenders to offer subprime loans in order to protect some of their investment. But there is little indication the government is saying that lenders have to offer subprime loans.

3. Access to credit really is an important issue. If it is not widely available or limited to certain groups, the purchasing power of consumers for goods like houses or cars can be severely limited. And this can then have a large impact on the greater economy.

Another possible consequence of the foreclosure crises: a lack of trust of financial institutions

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In recent decades, a number of sociologists have written about a necessary feature of human interaction: trust between the individuals or groups involved. Two sociologists discuss this in the Huffington Post:

While also feeling shame and embarrassment, even personal failure, for having allowed themselves to be taken in, these families are also aware of the exploitation they have experienced at the hands of their “trusted” financial advisors. That mistrust threatens the recovery some believe has begun in recent months.

As the British sociologist Anthony Giddens has noted, in complex societies where each individual cannot become expert in all the institutional contexts in which they must operate, trust is essential for people to negotiate the various realms, including financial institutions, in which they operate. People must feel secure in the trust networks they establish in order to survive and prosper, and for society itself to advance.

In a series of in-depth interviews nationwide with 22 adults who are at risk of foreclosure (they were either behind in their mortgage payments at some point in the past two years or, in two instances, had already lost their homes due to foreclosure) all respondents expressed both anger and personal responsibility. The interviews lasted between 30 and 90 minutes. In no question with any respondent was the word “trust” used. But in every case but one, the respondents explicitly referred to the mistrust they now have for anyone associated with the mortgage lending industry in particular or financial services generally.

From this short excerpt, it is hard to get an idea of how representative these 22 respondents are and how we can know whether their opinions reflect those of Americans at large. But if this is generalizable information, it suggests it could take a long for customers to approach the mortgage industry in the same way. At the same time, many Americans don’t really have many other options when shopping for a home: a mortgage is a necessity. So how could the mortgage industry once again gain the trust of consumers – special programs, special efforts, more government regulation?

According to the postscript at the end of the article, a longer argument from these two sociologists will be published soon in Social Science Quarterly.