Archive for the ‘Mortgages & Notes’ Category

New Jersey now has the highest percentage of mortgaged homes in foreclosure, out of all the states. NJ Spotlight has all of the dismal details. Here in West Orange, there are still quite a few large properties — some with incredible architectural details, or panoramic views of the Manhattan skyline — that remain entirely abandoned, six years after 2008.


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The New York Fed has an interesting white paper out by Robert Hockett, in which the author proposes the use of eminent domain to purchase large numbers of underwater mortgages — as in, the actual financial instruments. The idea targets mortgages whose debt holders are the holders of mortgage-backed securities– so called privately securitized mortgages. The strategy is based on the fact that PSM shareholders are such large and geographically dispersed classes that it is not reasonable to expect them to write-down the values of their claims in the same way that — say — a large bank could do. And, since there’s no cram-down power regarding home mortgages in bankruptcy court, the same write-downs couldn’t even be imposed through equity in cases where distressed homeowners wind up in bankruptcy. I thought the details of the proposal were fairly interesting to read through.

One aspect of the paper that’s really shocking is the following map, showing how many outstanding mortgages remain underwater, by county:

Underwater Mortgages as a Share of All Mortgages, by County, 4Q 2012. Source: CoreLogic Negative Equity Report, via Federal Reserve Bank of New York.

Underwater Mortgages as a Share of All Mortgages, by County, 4Q 2012. Source: CoreLogic Negative Equity Report, via Federal Reserve Bank of New York.

At the end of 2012, blue counties had the lowest rates of underwater mortgages, with increasing rates of negative equity correlating with increasing greenness, yellowness, and then redness. Note that (with the tiny geographic exceptions around wealthy New York City and San Francisco), the places with lowest levels of underwater mortgages are almost all rural areas that didn’t experience much of a run-up in residential property values in the decade before 2008. That’s a lot of pain.

It certainly makes theoretical sense that eminent domain can be used to take personal property — such as contract rights — and not just real estate. But it’s not something that you run across all that often. I liked this paragraph, summarizing the phenomenon:

Forms of intangible property that have been purchased in eminent domain include bond tax exemption covenants, insurance policies, corporate equities, other contract rights, businesses as going concerns, and even sports franchises (Hockett 2012a). Because the law draws no distinctions between kinds of property that can be purchased in eminent domain, it is unsurprising that loans and liens in particular, as one form of contractual obligation among many, are themselves regularly purchased. Among these are mortgage loans and liens, as the Supreme Court and state courts have long recognized.

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The Times editorial page expressed its support for a strong Mount Laurel doctrine, as Governor Christie continued seeking to dismantle New Jersey’s Council on Affordable Housing (COAH). Christie also vetoed the latest incarnation of the foreclosure land-bank for affordable housing, but he seems open to a possible reworking of its objectives through new legislation.

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In Canada and Hong Kong, apparently. It’s interesting. I’m kind of suspicious of these straightforward economic analyses of housing, though. They never seem to account for the artificial shortages that are created by calcified land use regulations in otherwise thriving regions. All of the supposed bubbles are in densely-populated, highly-regulated regions. I’m not an economist, but it seems to me that the combination of growing demand and constrained supplies will distort the prices of individual units upward; and that when one’s social and professional ties are concentrated in a particular region, then housing there is not a very elastic commodity. That is to say, cheaper housing that lies beyond the socializing/commuting frontier is just not a plausible alternative. Also, while creating a ratio between rents and purchasing costs might make for a useful rubric, the apparent disparities between the two may simply represent discrete snapshots in time, along a continuum of alternation between the two eternal models of housing occupancy. Right? Thoughts from readers more quantitatively-inclined than I am — and that would be most — would be appreciated.

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An interesting proposal, close to home: S-1566 was proposed in the New Jersey Senate by Democrats Barbara Buono and Raymond Lesniak. The bill is similar to a proposal in Truthout that LT linked to last month: It would authorize the state to acquire foreclosed properties, in order to assemble an affordable-housing land bank. Properties in the program would be conveyed to qualifying buyers with 30-year deed restrictions on future sale and rental prices; allowable prices would be pegged to an affordable ratio of the region’s median income.

I think this proposal is a good step. It would be hard to overemphasize the importance of the role that a durable stock of affordable housing could play in improving the economic health and social equity of New Jersey’s communities– or the price that the state has already paid in these areas for the absence of such housing. Since the 1970s, this state has followed the most affirmative approach to inclusionary housing in the nation. Yet, all of the statutory attempts to comply with the Mount Laurel doctrine have been inadequate to solve the state’s housing crisis. S-1566 strikes me as a modest but practical new way to approach the challenge of creating durable, affordable housing in competitive metropolitan land markets. Incidentally, the NSPs championed by HUD (under both Bush and Obama) have followed a similar approach, with deed restrictions and median-income ratios.

I would love to see an amendment to this bill that actively encouraged the formation of limited-equity co-ops, in order to develop high-density, privately-owned communities on some of the acquired lands. Obviously, this would work better in some places than in others. It worked well in New York City during the mid-20th century, and it could work well again in metropolitan New Jersey today. Another notable absence from the language of S-1566 is any reference to eminent domain powers. Presumably, the lenders wouldn’t bargain too hard for a lot of these properties, in the first place. However, the New Jersey Constitution of 1947 explicitly authorizes the use of eminent domain to acquire blighted parcels (N.J. Const. art. VII, § 3, ¶ 1), and I’d imagine that abandoned foreclosed properties would meet even the strict Gallenthin criteria for defining such conditions, if such an approach became necessary.

Update, 02/16: S-1566 passed unanimously in the N.J. Senate Economic Growth Committee on Thursday. It will now go before the full Senate, and its counterpart, A-2168, will be introduced in the General Assembly. Clearly there is a broad base of support for this measure in Trenton. In terms of finding bipartisan backing for a good idea, this is great news.

The main question I have now is about how the spending criteria will be developed. The Senate bill doesn’t spell out a set of conditions that must be met prior to property purchases. It may be that these matters are customarily developed on the ground, and not at the legislative level; I don’t know. But whether this issue should be explicitly worked out in the legislation, or somewhere else, I’d like to think a basic principle would be acknowledged with some specificity in the bill: Namely, that the amount paid to an institutional lender for any property acquired under this program must be limited to a price that ensures that the lender will be paid no more than a certain ratio of what the Corporation intends to ask for the eventual sale price of that property, pursuant to the affordability formula. Furthermore, reasonable projected costs for any necessary pre-occupancy repairs, upgrades, and legal work should also be subtracted from the maximum allowable purchase price under this program.

In most cases, I’d think that the right maximum ratio would be 1:1, minus costs, but there may be occasional situations where it’s worth taking a loss to acquire a particular property for a specific purpose. The point is that the state has leverage here: These are unsold, abandoned properties. Enacting language that exercises that leverage for the benefit of New Jersey taxpayers could greatly mitigate the potential for program losses, and quell public suspicions that a government program might overpay lenders to acquire low-value properties. In exchange for greater solvency and legitimacy, such language would likely result in at least two trade-offs: First, it would likely reduce the total number of properties in the program portfolio. Second, it would sharply reduce the number of program properties in expensive neighborhoods. But I think these outcomes would merely emphasize the limitations of this solution. At best, this program could be one more piece of a larger housing puzzle.

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The Recent Mortgage Settlement

The Los Angeles Times has an article by Michael Hiltzik that casts the recent settlement between several major U.S. banks and 49 state attorneys general in a pessimistic and cynical light. Among his main points: (1) The supposed $25B price tag is misleading, because it is comprised mostly of a rosy estimate of future principal write-downs and interest-rate reductions for non-foreclosed mortgagors; (2) the states will receive only approximately $5B in direct payouts from the deal; (3) of the two million owners who have lost homes to foreclosure since 2008, only about 750,000 will receive compensation– at a grand total of $2,000 each; and (4) a separate suit by the federal Office of Comptroller of the Currency has been quietly settled for nothing, so long as the defendant banks follow through with their agreements in the main settlement with the states.

My sense, after hearing a passing summary of the deal on N.P.R., was that the settlement was very modest. Reading this article, and a few other news reports, has not changed my mind. One bit of a silver lining: Attorney General Schneiderman’s MERS action, filed last week in Brooklyn, will go forward, in spite of this settlement– and so will a number of other state actions. So, this agreement may turn out to be just one piece of a larger puzzle.

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Here’s an interesting proposal for all of the disused properties that have been tied up in the MERS mess: Use eminent domain to assemble them into land banks for future equitable purposes. I suspect, at the end of the day, the real banks will find a way to hang on to the bulk of what’s in their portfolios. On the other hand, the sheer scale of those portfolios might be more than they want to fight for. A couple of years ago, I had a summer job where I helped to implement HUD affordable housing programs in Newark. At the time, there were blocks in the Clinton Hill and Roseville sections where nearly half the properties were in some sort of bank-owned limbo. It’s easy to forget, when you’re in the suburbs, just how much urban land investment has been wiped out in the last few years. The dearth of affordable housing in regions like the Northeast and California might be addressed if even a portion of this land could be deeded to high-density, limited-equity cooperatives.

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