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Housing fix has strong enemies

The federal government and the banking industry have failed to bring mortgage relief to homeowners in need. Richmond's plan to use eminent domain would help fill the void.

August 30, 2013|Michael Hiltzik

The city's offer came to $126.5 million, or a little over 52% of the unpaid balances. "The prices being offered for these loans are wildly low-ball numbers, points and points and points below fair value in this market," says Daniel Ivascyn, head of the mortgage portfolio team at the Newport Beach investment firm PIMCO, which owns some of the mortgage pools at issue and is pressing for the injunction. That said, the mortgages sought by the city average out at 37% underwater. That's a level at which the risk of default is high, even if they're not yet delinquent. 

Here are some important points: The city made clear these were opening bids — it invited the banks to counter "if for any reason you are not satisfied with this offer." Second, a true low-ball offer wouldn't survive the eminent domain process, because under state law, the owner of seized property can demand a reappraisal from a court. Third, the city hasn't actually started any eminent domain proceedings — that will require a separate vote by the City Council. In other words, the banks have gone to court to stop a program that doesn't actually exist yet.

The mortgage industry has responded to Richmond with all the fatuous flimflam you would expect from a gang that has never owned up to its responsibility for the housing disaster.

In a declaration filed with the Wells Fargo lawsuit, Mortgage Bankers Assn. Chief Executive David Stevens characterizes the typical mortgage contract as a homeowner's "unconditional promise" to repay the loan in full, "regardless of the future value of the house or any other set of circumstances." His point is that using eminent domain interferes with this sacred relationship.

There are only two possible interpretations of this statement: Stevens is either shockingly ignorant, or he's lying. The truth is that there's nothing "unconditional" about a mortgagee's obligations. Homeowners can always walk away from the loan, on condition they're prepared to give up their home to the lender, suffer a hit to their credit rating, and in some states be sued for other assets. California is not one of those states: If a borrower defaults on an original mortgage to purchase a house, whether inadvertently or deliberately, the lender can take the home, and that's all. (As of this year, that protection extends to many refinancings, too.)

The idea that homeowners should spend their way to poverty or death to keep up the mortgage is a fiction concocted by the mortgage industry to protect itself and discourage homeowners from considering their own financial interest when their homes are deeply underwater.

The plaintiffs call the proposed use of eminent domain unconstitutional, although the Supreme Court has ruled in the past that intangible property such as mortgage contracts can be seized, and (in 2005) that seizing private property and handing it over to private entities is legal if it promotes economic development.

In any case, that sounds like a question to be resolved in court after Richmond actually seizes a mortgage, not before. But the real purpose of the lawsuits may be to intimidate other municipalities considering the eminent domain scheme, by showing that they'll be tied up in legal fees.

The banks argue that the Richmond initiative is unnecessary because they already do their utmost to reach out to struggling homeowners. This is according to a declaration by investment banker Philip Burnaman, also filed by Wells Fargo. Burnaman states that the banks "go to great lengths" to reach out to troubled borrowers and "attempt ... to modify the terms of the loan in order to increase its affordability."

This may be true, in fairyland. In the real world, banks haven't done nearly enough along these lines. Rather, they've engaged in all sorts of abuses of strapped borrowers, including improper foreclosures.

That's why five major banks — including Wells Fargo, which is suing Richmond — last year signed a $25-billion settlement with federal and state officials to stave off criminal prosecution. And just three weeks ago a federal appeals court in San Francisco whacked Wells Fargo — there's that name again — for what one of the judges labeled its "fraudulent" treatment of a borrower seeking a loan modification. The judges overturned a lower court ruling in the bank's favor and sent the case back down for trial.

Some investors observe that servicers of securitized mortgages have been doing better for strapped homeowners in recent years. "Three or four years ago there would have been a better case" that securitized mortgages weren't getting needed modifications, Ivascyn says. In fact, of the 624 loans Richmond wants to buy, more than half have already been modified at least once, including 40 that already have had principal write-downs. So it's not as if the banks have done nothing.

Richmond's point is they haven't done enough. In its lawsuit, the Bank of New York grouses that the city's offers are too low even to be "the beginning of a constructive negotiation." If that's so, the banks should call the city's bluff: Sit down and negotiate.

Michael Hiltzik's column appears Sundays and Wednesdays. Reach him at mhiltzik@latimes.com, read past columns at latimes.com/hiltzik, check out facebook.com/hiltzik and follow @hiltzikm on Twitter.

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