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Eminent Domain As Underwater Mortgages Fix: Why Some Cities Are Considering Unorthodox Measure

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EMINENT DOMAIN MORTGAGES
File photo of a march at the Capitol on June 25, 2012, to protest home foreclosures in Sacramento, Calif. New foreclosure data show that banks are increasingly placing homes with unpaid mortgages on a countdown that could deliver a swell of new foreclosed properties onto the market next year. (AP Photo/Rich Pedroncelli, File) | AP

SACRAMENTO, Calif. -- Ask Vice Mayor Angelique Ashby what pushed her to this point -- the point at which she is openly considering using city authority to seize and write down mortgages -- and she'll tell you about the two school teachers who live on her block.

They had figured their unassuming single-family home would rise in value over the decades, functioning as the primary storehouse for their savings. In their working years, they would enjoy a pleasant place to live. Upon retirement, they would have an asset to sell to finance their later years.

Now, as they approach retirement, their would-be asset is just another "underwater" home in a community saturated with them. Like the vast majority of homeowners in the North Natomas neighborhood here in California's capital, the teachers owe the bank more than their home is worth.

"How are they supposed to capitalize on the largest single purchase they will ever make?" Ashby asks. "That's not going to happen in their lifetime."

What is happening is an unrelenting diminishment of expectations for many of the 58,000 people who live in North Natomas, a wrenching process that has replaced traditional thoughts of upward mobility with an everyday struggle to hang on.

Nearly 70 percent of the homeowners in Ashby's zip code are underwater, according to RealtyTrac, an online marketplace that specializes in foreclosures. Nearly half are considered "seriously underwater," meaning the homeowners owe the bank at least 125 percent of the value of their property.

These facts have insinuated themselves into seemingly every aspect of local life. Fearful that a financial shock -- an illness, a lost job -- could cause to them to fall behind on their mortgage payments and ultimately lose their homes, underwater borrowers are hunkering down and forgoing spending, even on necessities such as groceries and home repair. Local businesses are shuttering, which has exacerbated a weak job market and put more homeowners in danger.

As people relinquish homes to foreclosure or simply walk away from failed investments, and as developers scrap plans for construction, the city's tax base is shrinking, prompting officials to cut back in other ways -- laying off cops and limiting service at fire stations.

This is how Ashby, the 37-year-old lawyer and mother of two who represents North Natomas on the City Council and who seems about as radical as a two-car garage, has come to publicly contemplate a step that the American financial services lobby has branded a threat to the basic function of modern commerce: She wants the city to consider a proposal advanced by a San Francisco-based investment fund, Mortgage Resolution Partners, that would relieve homeowners of some of their mortgage burden by using the city's so-called power of eminent domain, a power normally reserved for condemning property that sits in the way of a planned highway or power line.

In this case, Sacramento would condemn some underwater mortgages, buying them at far less than face value using resources advanced by the venture fund. Homeowners would see equity restored, allowing them to refinance into new mortgages at lower rates of interest, thus yielding lower payments.

This is not a story about the merits or shortcomings of this particular proposal, which has already generated national attention. The banks that control mortgages deride it as an affront to the sanctity of contracts. Even some people who advocate principal reduction, such as financial blogger Felix Salmon, have branded the proposal a sweetheart deal for the venture fund. The fund's backers argue that they are merely stepping in to assist troubled municipalities with a pragmatic, if unorthodox, solution to a festering, vexing problem.

For a satisfying dive into the nitty-gritty of that important debate, read this piece from HuffPost reporter Ben Hallman.

This story, rather, is about why that debate is even taking place. What has happened to local economies from Northern California to South Florida to provoke desperate efforts to rescue underwater homeowners? Why are municipal officials -- people accustomed to staffing libraries and adding speed bumps -- now considering a tactic that would put them at odds with the titans of American finance?

The mere fact that the Mortgage Resolution Partners proposal is under consideration here and in perhaps a dozen other municipalities -- including Chicago, Detroit, San Bernardino county in Southern California and New York's Suffolk County -- speaks to the growing frustration in many of the hardest-hit underwater communities as the crisis grinds on without a comprehensive federal solution.

It is a crisis that continues even as housing prices recover here and in many other American metropolitan areas, where a sense has taken hold that the worst of the bust is over. Despite hopeful signs from long-depressed housing markets, so many people remain underwater -- roughly one in five mortgage holders in America -- that even a sustained period of recovery will leave tens of millions of households without equity.

"Much of what we have done to resolve the housing crisis in our country has not reached my community," Ashby said. "Or, to the extent it has, it's been inadequate."

AN UNLIKELY CHAMPION

Ashby claims no expertise on the venture fund's proposal. She had not even heard of it until a few weeks ago, when a consultant working for the firm reached out to set up a meeting.

When we met on a recent morning, she was apparently unaware that Mortgage Resolution Partners is a profit-making entity -- one backed by well-connected investors such as former San Francisco Mayor and California Assembly Speaker Willie Brown -- saying at one point, "I don't know if there are other nonprofits doing that type of work, but I think it's an interesting proposal."

But in the course of two hours spent driving through North Natomas with Ashby, what comes across more than anything are the forces assailing her community, and the sense that her constituents are ensnared in a financial pit with no rescue in sight.

This reality can be seen in the "for sale" signs stuck in front of empty driveways and in the vacant storefronts that pockmark largely deserted strip malls near half-built subdivisions. It can be heard in the now-commonplace tales of ordinary people stuck in ordinary homes without any equity, shelving thoughts of car repairs or replacement of aging roofs, let alone retirement.

"There are people here who bought homes for $500,000 that are now worth $250,000," Ashby said. "There are a lot of people like that. I'm not willing to be the cheerleader for any one solution. What I am willing to do is stand up and say, 'We have a really big problem in our community.'"

Ashby seems miscast as the bearer of the message that something less than wonderful is unfolding here. Unrelentingly upbeat, she speaks in the chirpy, positive vernacular of a real estate agent addressing a Rotary club luncheon. As she drives through the look-alike subdivisions of her district -- a sun-baked expanse of Mediterranean-themed homes in various shades of beige -- she sounds as if she might be narrating an advertisement for California-style suburbia.

"We have one of the fastest growing Little League baseball leagues in the state," she crows. "We also have one the fastest-growing chapters of the Boy Scouts." The presence of an Applebee's merits mention, as does a Subway sandwich shop. She points out the neatly manicured soccer fields, the children playing in sprinklers.

"We need to fix this for them," she says. "I love this community. Who wouldn't want to live here? Don't you just want to move here?"

Part of Ashby's pride comes from having watched this pancake-flat patch of former farmland turn into the grid of subdivisions and strip malls it is today.

"I remember when this wasn't here," she says at the coffee shop that has become her regular hangout. "I remember when we were waiting for the grocery store to come in."

Now, it's as if she is watching her community being taken apart.

She runs through a subdivision in which the abandoned concrete foundations outnumber completed homes. A pair of mothers push strollers past loops of electrical wire awaiting the resumption of construction, a day that does not appear imminent. A model home on the corner is cloaked in weeds.

"That's depressing," Ashby says.

She pointed to the empty spaces in the strip malls. "That used to be a video store," she says. "That used to be an ice cream parlor."

She points to a blank strip of earth running in front of a strip mall. "That's the future light rail," she says. Plans once had Natomas connected to the Sacramento airport by 2020, but the future has been deferred. "There's no active date now," she says. "It's a ways out."

She drives past one of the fire stations where service has been limited in the face of budget cuts.

She points to what was supposed to be an office park, now a skeleton of concrete bones against blue sky.

"I call that Stonehenge," she says. "There's nobody to go open a business there."

This landscape of diminished expectations is not solely the product of the real estate bust. It is also the result of another American disaster, Hurricane Katrina. The storm swamped levees through the Mississippi Delta, prompting the federal government to downgrade the safety ratings of other installations, including those holding back the Sacramento River from the dry land of Natomas. That delivered a moratorium on local construction.

But a lot of the dislocation reflects the fact that so many people are underwater.

People are stuck.

'I'M AT BOTTOM'

Wendy Wein is among those stuck, a particularly uncomfortable situation given how much of her career has been devoted to helping other people get themselves unstuck.

Calm, self-assured and warm, Wein, 69, makes her living as a life coach. She helps her clients, many of them small business owners, confront the obstacles in their lives, from health and relationship issues to attitudinal adjustments.

"I work with people to strengthen all areas of their lives," she says. "My whole life, people have come to me saying, 'Can you help me?' People have been drawn to me."

Now, she needs help.

Wein is delinquent on the mortgage on her underwater house and is sliding toward foreclosure with no real plan to avoid that fate.

"I'm a very positive person by nature," she says. "But I don’t know what I'm going to do."

She bought her two-bedroom home four years ago, shortly after moving here from Tucson to be closer to her daughter.

"This house felt like mine from the minute I walked in," she says. "It was everything I wanted."

Airy and light, it was set back from the street and behind shrubbery, providing peace and quiet. It had a screened-in porch that caught the breeze and a double-high ceiling in the living room. It had a fireplace and included access to a community swimming pool.

The price was $260,000, which seemed a stretch. But the voice in her head urging her to buy was echoed by the financial players keen for a sale. "I kept saying, 'I can't afford it,'" she says, "and the bank kept saying, 'Yes, you can.'"

She put down $25,000 -- the entirety of her savings -- and borrowed the rest, yielding a monthly payment of just under $1,500 a month, she says.

At the time, that seemed manageable. She was earning about $75,000 a year. But as the Great Recession intensified and her clients began falling into trouble -- many were underwater, too -- most canceled her services in an effort to cut their expenses.

By 2009, Wein's income had fallen to $60,000, she says. Today, coaching is bringing in only about $750 a month, she says, supplementing the $1,136 a month she receives from Social Security.

Citing her loss of income, Wein last year applied for a loan modification from her lender, GMAC. The company dropped her payments by about $300 a month, she says.

But now, with clients continuing to disappear, she can no longer manage even that sum. Refinancing at a lower interest rate is not an option, because her house is worth only about $180,000.

Wein says she has not made a payment in five months, she says, an admission that brings tears to her eyes.

"I've worked my whole life," she says. "My whole life. And now I'm just lost."

Wein suffers from rheumatoid arthritis, a painful condition that prompted her doctor to prescribe expensive medication that is not covered by Medicare, so she goes without. A local medical center keeps sending her bills for the $1,000 in payments she owes for extra tests, but she cannot pay.

The brakes on her 2003 Saturn sedan are no longer safe, but she has no money to fix them, so she drives as little as possible.

Her cell phone service was recently cut off for lack of payment, forcing her to rely on email for communication. She canceled cable television to conserve cash.

Wein grew up in Philadelphia, where her father worked for the post office, and then opened a luncheonette serving the men who worked in nearby factories.

"We were totally middle class," she says.

Now, at an age at which she had envisioned herself dining out, going to the theater and entertaining her four grandchildren, she is instead looking into local food banks.

"I never imagined this," she says. "I'm at bottom."

She has been trying to find a job, dusting off a resume that includes teaching and experience as an optician. She has applied for positions in both fields, she says, but never heard back. She has investigated working as a "secret shopper" for major brands, but has gotten nowhere.

"Looking for work is frankly a joke," she says. "No one's hiring anyone my age."

She considered declaring bankruptcy, but the lawyer she talked to demanded an upfront payment of $1,600. "I said, 'If I had $1,600, I wouldn't be here,'" she says.

The bank recently called to see if she was willing to unload her house in a so-called short sale, meaning for less than her outstanding loan balance. If she sold, she would be off the hook for the payment, but she would also have to move. With no savings and tattered credit, she is fearful she would be unable to secure another place to live.

So she stays on, even as she falls further into arrears, even as the fear of foreclosure builds, because the fear of what might happen if she leaves is greater. She stays, even as she has no idea how to hang on to her home, because letting it go feels like a submission to free-fall.

She could be calling legal aid lawyers, she says, or reaching out to state-funded programs designed to keep people in their homes. But simply being in this situation -- the life coach with a shelf full of self-help books reduced to a state of hopelessness -- breeds paralysis.

"My problem has been that I'm so down that I can't get into action," she says. "I'm really a very proactive person. I've always been that way. But I can't seem to get moving."

Wein has been seeking to rent one of her bedrooms as a source of income, but her online ads seem to bring only con artists – emails from supposed students in faraway countries conjuring up elaborate transactions that involve her wiring out funds.

She looks after her home in the same way as ever, keeping it impeccably neat. (When I put my water glass on the coffee table, she quickly ensures that I use a coaster.) But she does not know how this will end, and she cannot make sense of how this has happened, this descent into a part of her life she never saw coming.

"I'm barely hanging in there," she says. "I don't know how I'm going to get out of this."

A SENSE OF OWNERSHIP

Karen Wilson's income has not fallen. She is solidly employed. No catastrophe has descended. Yet, at 54, she confronts the sense that her life has involved too much labor to maintain her tenuous perch and not enough progress.

She, too, feels a basic lack of economic security. She, too, is underwater.

Wilson arrived in Sacramento 16 years ago from Berkeley, the university town in the San Francisco Bay Area. Life had become exceedingly expensive there, and she was looking for someplace easier.

She found it in Natomas, in a four-bedroom bluish-grey ranch house whose previous owner was looking to sell it by finding someone to assume his mortgage, which carried a balance of $100,000.

Over the subsequent years, Wilson more than doubled that balance as she drew on a home equity line of credit to get through unexpected difficulties, and as she reinvested in her most valuable asset: her home.

When termites assailed the house, she borrowed to fix the damage, and she put in a new bathroom. When the air conditioning went out -- a crisis in California's Central Valley, where summer temperatures regularly reach triple digits -- she borrowed some more.

Far from reckless, this seemed like the normal course in a nation awash in real estate winnings. By 2007, her house was worth more than $300,000, and her mailbox was flooded with offers from banks seeking to turn her additional equity into cash in hand.

But when housing prices reversed, so did its attendant wealth creation. Wilson's home is today worth only about $100,000, she says.

She has had the same job for the last 12 years, collecting samples for an environmental testing laboratory. It pays $42,000 a year, she says, the same amount she was making five years ago.

Her company recently raised the amount she must contribute toward her health benefits, while increasing the deductible. Gas prices have climbed, raising the cost of her 10-mile commute.

"Everything has gone up except my paycheck," she says.

In the grand scheme of things, Wilson is cognizant that she is more fortunate than many. She seeks no pity. But she bemoans the feeling of being mired in place with no reasonable hope of upward mobility.

She has not had a vacation in nearly 20 years, she says, recalling a trip to Mexico. She cannot take her three grandchildren to the movies without months of setting aside extra money, she says. She has no savings, working merely to maintain her daily existence.

"It's depressing to work only to pay your bills," she says. "It's a bad way to have to live. What about the rewards we are due after you work your whole life and play by the rules. Don't I get to have fun now?"

Three years ago, when she found herself struggling to make her mortgage payments, her lender gave her a rare principal reduction, dropping her balance from $220,000 to about $200,000, she says. That cut her monthly payments from $1,350 to $1,250, she says.

But this summer she fell behind, after her 1999 Chrysler minivan, her sole means of getting to work, fell into disrepair, requiring a $5,000 fix.

The affection she feels for her home is palpable. It is in the African statuary adorning her living room and the entire wall of family photos, many of her late father, who lived here for the last six months of his life. It is in the incense and scented candles in her bedroom, and the sheen on her kitchen counter.

But her sense of ownership has been eroded.

"I had planned to have this house paid off in another 20 years," she says. "My sadness in this deal is I won't ever own this house. This is not an asset for me."

This is what the vice mayor is seeking to restore, she says, that sense of ownership, a stake in the community, the feeling of long-term commitment that inspires people to look after their homes and keep an eye on their neighbors and volunteer at the local school.

"Don't we as a country need communities like Natomas to succeed?" she asks. "We have an entire generation that may never really own their homes. When you're underwater, there's basically no safety net."

This is something personal, she says, because she and her husband are underwater.

In the weeks since Ashby was quoted in the local newspaper, the Sacramento Bee, expressing interest in the eminent domain proposal, she has been flooded by emails expressing support, plus a few that have questioned her understanding of the role of government, suggesting that the scheme under consideration amounts to an encroachment on free enterprise.

"I'm not concerned about the government interference piece," she says. "Government's responsibility is to intervene on behalf of the public interest. That's what the police do. That's what the firefighters do."

And that's what the federal government hasn't done, she says, asserting that Washington has instead allowed the damage of the American housing bust to build to such proportions that it poses a crisis for myriad communities. Not just this one, but everyplace where a prior familiarity with home equity borrowing has given way to an understanding of the vagaries of the foreclosure process.

Ashby is not sure what exactly needs to be done, but she is certain that it has to be something.