If Brockton passes on the prospect of becoming the first American municipality to seize troubled mortgages by eminent domain, it won’t be because the city is worried it’s on the wrong side of the law.
As Brockton begins a months-long study debating the use of eminent domain for mortgages, even the effort’s skeptics believe the city would have a decent shot at defending the radical proposal in court. The eminent domain debate in Brockton isn’t about legal nuance; it’s about whether the city can afford to pick a fight with the country’s biggest banks, and whether doing so would bring real relief to the city’s troubled homeowners. Housing prices in Brockton remain far below their 2005 highs, and distressed sales continue to dominate the market (see chart below).
The Brockton City Council recently launched a series of hearings and meetings investigating a proposal to seize underwater mortgages – loans with balances that exceed the current value of the homes they’re tied to. CommonWealth’s winter issue detailed the proposal, versions of which are being debated across the country. Municipalities normally employ eminent domain to take real estate. But as housing values have plummeted and foreclosures have piled up, housing advocates in hard-hit areas have pushed the idea of using eminent domain to take underwater mortgages from banks and investors. The mortgage-takings would be priced at market value for the homes, reducing the amount homeowners owe and handing sizable losses to the mortgages’ original holders.
San Bernardino County, the hard-hit California county that was the most prominent advocate of mortgage eminent domain, recently abandoned the idea. Eminent domain remains an intriguing proposal in Brockton, though, because the city’s foreclosure-scarred housing market has yet to see the recovery now taking hold in other corners of the state. The housing crash has paralyzed the market in Brockton, warding off investment and leaving homeowners making sizable monthly payments on homes they have zero equity in.
“Home is where most people have their capital,” argues Jass Stewart, the Brockton city councilor leading the eminent domain inquiry. “It has frozen, in our community, the ability of families to reinvest locally, because they no longer have the use of the equity in their home to generate economic growth.”
Stewart’s inquiry centers on about 2,000 Brockton mortgages that were bundled into complex pools of mortgage securities and sold to Wall Street investors. He believes that these loans represent the riskiest lending practices of the housing boom, and says borrowers with these mortgages have had the hardest time modifying or refinancing their loans.
Stewart’s working group will be hashing through the legal issues surrounding the proposed seizure of these 2,000 mortgages, as well as questions about how Brockton would finance and manage such an undertaking. At the same time, he concedes, the question of whether the city ultimately proceeds with a taking will likely be “more of a political issue than a legal issue.”
San Bernardino’s flirtation with eminent domain invited intense political and financial pressure. Some banks threatened legal action; others predicted that eminent domain would scare all future lending out of the county. “We’re going to weigh where the benefits are and where the dangers are, but we’re not going to use fear as an excuse to not look at the issue,” Stewart adds. “I know that doing nothing won’t help. The question is, is this something that creates value?”
As the study moves forward, Stewart is going to have to convince folks like John Condon, Brockton’s chief financial officer. Condon believes that federal inaction on toxic mortgages in late 2008 left blue-collar cities such as Brockton debating action “on the margins.” Federal bailout money that was supposed to be spent systematically buying up troubled mortgages was instead stuffed inside large banks. “The banks got the cash to improve their balance sheets,” he says, “and the other side of the contract got screwed.” Still, Condon worries that Brockton’s eminent domain efforts wouldn’t be big enough, or quick enough, to help the homeowners who still need help.
He worries about getting hung up in a court fight the city can’t afford, and believes the city doesn’t have the legal ability to float bonds to finance a mortgage-taking. But most of all, he worries that, if Brockton is the first city to try seizing mortgages from investors, the ensuing legal battle would leave scores of homeowners stuck in limbo. “At the end of the day, will we be able to do it in a timely fashion?” Condon asks. “If we’re talking about people who are in imminent danger of foreclosure, can we do something rapidly enough to help them?”