Home prices have been on the rise for several quarters now but the housing crisis is not nearly over.
Despite the speculator-fueled rise in home prices in some parts of the country, hard-hit neighborhoods are still reeling, as America continues to grapple with the consequences of reckless predatory lending that caused the housing bubble to burst.
The subprime implosion cost more than 10 million Americans their homes through foreclosure. That’s more families than the population of Michigan.
And nearly 10 million households are still underwater—owing more on their mortgages than their homes are worth. Entire cities and neighborhoods have become blighted by plummeting home values, vacant properties, and decrease in tax revenue. The report, “Underwater America: How the So-Called Housing ‘Recovery’ is Bypassing Many Communities” published by UC Berkeley’s Haas Institute for a Fair and Inclusive Society, where I serve as Director, shows that one in ten Americans lives in the 100 hardest hit cities where the number of underwater homeowners range from 22 to 56 percent.
A Baltimore lawsuit estimates the total costs for that city are about $34,199 per foreclosure. A federal court ruling recently pointed to the wave of municipal bankruptcies as a direct result of the foreclosure crisis.
What’s worse is that unintentionally or not, the history of the housing crisis is deeply linked to past practices of racial discrimination that have been structured into the current credit market. The mortgage crisis has fallen disproportionately on communities of color, wiping away generations of hard-won wealth.
Banks had long excluded low-income, minority areas from loan availability, a practice known as redlining. During the subprime boom we saw a new practice – reverse redlining. High-cost loans were five times more likely to be made in African American neighborhoods than in white neighborhoods.
The response by the government and the banking community has been grossly inadequate. The Home Affordable Modification Program (HAMP) and Home Affordable Refinance Program (HARP) programs have been notable, high-profile failures. These programs did not sufficiently incent banks to do what was really necessary to fix this crisis: to modify mortgage principal.
In response, a growing number of cities on both coasts are exploring an unusual response to an unusually difficult problem, with a program they are calling “reverse eminent domain” or local principal reduction.
The city of Richmond, California, voted to enact this program to acquire some of the hardest-to-modify, deeply underwater mortgages, and to then restructure the loans with reduced principal and terms that make the new mortgages affordable and sustainable for the homeowners.
Cities exploring this approach have made clear that they prefer to negotiate a purchase of these loans based on fair market value but they are prepared to use their power of eminent domain to acquire the loans, if necessary, in order to prevent further deterioration of their communities.
The financial industry has responded with threats of a new kind of redlining. The Securities Industry and Financial Markets Association has passed a policy that raises the price of credit for any community that uses eminent domain in order to restructure mortgages for homeowners.
Banks such as Wells Fargo, and institutional investors such as BlackRock and Pimco, sued the City of Richmond—unsuccessfully so far—rather than accept the city of Richmond’s offer to negotiate a solution that works for both homeowners and investors.
What is more surprising is that the Federal Housing Finance Agency—the governmental overseers of Fannie Mae and Freddie Mac—has thus far sided with industry lobbyists and speculators instead of working with cities like Richmond and homeowners looking for relief.
Community groups and the ACLU filed a Freedom of Information Act request and sued the FHFA to uncover the efforts of big bank lobbyists to crush local anti-foreclosure initiatives. One email turned over by the agency shows a bank lobbyist noting with alarm that the only banker on a city task force on eminent domain in Brockton, MA “is also a Past President of the Brockton NAACP.”
Housing advocates applauded the confirmation of former Congressman Mel Watt, long an advocate of fair lending, to lead the FHFA at the beginning of this year. One simple step he could take quickly would be to withdraw the threats to punish communities that pursue a local foreclosure solution that may include the use of eminent domain.
Civil rights laws have been enacted in efforts to overcome disparities among whites and people of color in the credit and housing markets. But the subprime crisis and the response by the banks and federal government thus far will continue to hurt entire communities even as they exacerbate unequal opportunity and outcomes based on race.