by James Stefanile, ABR, GRI, SRES, QSC, gCertified, Salesperson/REALTOR, Prudential NJ Properties, Montclair, NJ
The Federal Government’s programs to assist financially distressed homeowners have not performed up to expectations and have helped only a limited few. Congress would not authorize bankruptcy judges to modify distressed mortgages by court order in order to assist homeowners in bankruptcy to fairly re-structure outdated or predatory mortgage loans.
The banking industry has pretty much had its way with regard to dealing with underwater and distressed mortgages. This is despite its robo-signing, its redlining practices, betting against its own toxic securities, its part in the greatest domestic and world-wide financial collapse since the Great Depression, its rescue at every taxpayer’s expense and isolated incidents of out-and-out fraud.
Now, a few municipalities have hatched a new plan to help distressed homeowners within their borders since it’s clear the Feds aren’t going to help and the banks are a united front against these owners while large swaths of some towns disintegrate.
The plan is for the municipality to offer to buy distressed properties’ loans, pay the lender a fair market value and then sell the property back to the homeowner, after the town takes a write-down, with a modified, refinanced mortgage, most likely through a government program. The investors who put up the money to buy the original loan and the town would benefit from the way the town writes down the loan and the homeowner may go from being underwater to actually having some equity in the property. If the lender declines the offer the municipality would use its right of eminent domain to condemn the properties and buy the loans with the permission of a court.
The aim of this plan is to prevent neighborhoods from falling into disrepair with the presence of foreclosed or abandoned properties and to assist the town’s citizens who have suffered from outdated or predatory lending practices.
As you can imagine, the banking industry is strongly opposed and is threatening any town with the nerve to hatch this plan with the prospect of a lending embargo and lawsuits. What’s puzzling to me, however, is the opposition of the National Association of REALTORS.
The banks are opposed because they give up domain over their customers only at the point of a gun. They complain the eminent domain strategy is government interference in private enterprise but they were more than willing to accept the government’s interference in the form of billions of dollars in bailouts. The REALTORS (NAR) claim this eminent domain idea (they call it a “scheme”) strikes at the heart of private home ownership and property rights. The banks and NAR have called this “unprecedented and unconstitutional”. In other words, they are using the old chestnuts of ”property rights” and a threat to private enterprise as opposition to this strategy which they feel will compromise their industry position. I have come to regard this and many of NAR’s positions as knee-jerk, calcified opinions justified by their claim to be the protector of home ownership. This is only a cover story for the real reason for NAR’s opposition – it may disrupt the flow of dollars in the real estate industry. If NAR is the protector of home ownership it’s odd that they aren’t in favor of protecting the home ownership of the Americans affected by the financial crisis.
Sure, there are risks for abuse by homeowners under the eminent domain plan as NAR warns ominously. But there is a court ordered step in the process which can be a protection against abuse. Opponents of this strategy use the public’s existing fear of eminent domain to paint this very specific strategy as an example of Big Brother seizing properties. They argue that undeserving, irresponsible homeowners will also be rescued. This is a blanket indictment ignoring the millions of Americans who have either fallen on hard times through no fault of their own or have watched their property’s equity disappear. As far as property rights are concerned, I wonder if any of these distressed homeowners feel their rights are being abused. As to the rights of their financially secure neighbors, anything that will prevent neighborhood homes from falling into vacancy will protect their property’s values and the quality of their neighborhoods, promoting the public good and preventing the blight, crime and vandalism associated with abandoned properties. Municipal governments have the right and the obligation to maintain a high quality of life for the constituents they represent.
Banks are terrified that eminent domain strategies could, among other things, engulf the secondary liens and equity lines of credit they hold. They posture opposition based on morality and fairness, but, in fact, their concerns are dollar based, as always. As far as the banks’ investors are concerned, eminent domain strategies just may be a way, possibly imperfect, but at least a valid attempt, to fix a mess that has defied solution for many years.
The National Association of REALTORS, as the largest trade organization in the country, has been very successful politically and in protecting its turf. There are already rumblings in Congress of legislation and regulations to prevent eminent domain in these situations . I’m sure NAR’s lobby has been busy with our leaders – elected representatives who should be concerned with their constituents and not the welfare of the National Association of REALTORS and the national banking trade organizations..
It may seem strange that I, a REALTOR, should have a favorable opinion of eminent domain as an instrument to deal with distressed mortgages. My position is that it’s worth a look and not worthy of being murdered in its cradle because of the entrenched interests of entities with large influence. I understand, and benefit from, the importance of the bottom line in banking and real estate. I have also seen, in my career, the flip side of capitalism in all its gruesome glory – situations where money was the only motivator at the expense of fairness, professionalism and common sense. I also understand that the unfettered and unregulated pursuit of profit is what almost sent the world economy off the cliff. It’s time for new initiatives that take into account more than just the bottom line and it’s time for the trade organization that, supposedly, represents me to think beyond the dollar sign at the end of its nose.