Wall Street tore the heart out of our economy. It profited wildly by puffing up the housing bubble. It profited wildly again when the federal government provided more than $10 trillion worth of bailout money and loans. And right now, 95 percent of the economic growth of our so-called recovery is going to the top 1 percent -- the very bankers, traders and mortgage moguls who wrecked the economy in the first place. Meanwhile, Wall Street's reckless gambling caused more than 8 million workers to lose their jobs in a matter of months.
Today -- five long years after the collapse -- we face a sustained unemployment rate higher than anytime since the Great Depression. In addition, housing values have plummeted. For many, the value of their homes has fallen by half. Even with the recent uptick in housing prices, 10.8 million homeowners are still underwater -- meaning that their homes are worth less than their mortgages. The total amount of negative equity stands at $805 billion as of October, 2013.
Being underwater is a big, big problem brought to us by Wall Street's predatory profiteering. If you're underwater and need to move, you'll still owe the bank after you sell your home (called a short sale). Or you could just walk away from your home and let the bank foreclose, which means you'll lose whatever equity you had and see your credit rating crash. Further, if you're underwater it probably means that you're living in a neighborhood with many foreclosures, which often leads to safety concerns and further downward pressure on the value of your home as well as raising the costs of local policing and sanitation services. And of course, if you lose your job, you are in great danger of losing your home as well.
Predatory Lending: Minorities are the hardest hit
The problem is particularly acute in areas with high numbers of minority residents where the negative equity rate is likely to be twice as high as white neighborhoods. For example, according to the Woodstock Institute,
"In highly African American communities in the Chicago six county region, 40.5 percent of borrowers are underwater, while another 5.4 percent are nearly underwater. Similarly, 40.3 percent of properties are underwater in predominantly Latino communities and 5.3 percent are nearly underwater. In contrast, only 16.7 percent of properties in predominantly white communities are underwater, with another 4.4 percent nearly underwater."
This is not an accident.
Wall Street banks, brokers and mortgage companies targeted minority neighborhoods for high-profit sub-prime loans. Using every sales trick in the book, they loaded up new homeowners with loans that were costly to the borrower but extremely lucrative to the mortgage companies and then to the Wall Street financial engineers. This is called predatory lending and all our governmental watchdogs knew it was happening at least since the 1990s. The tragedy is that many of these borrowers actually wanted, and qualified for, conventional mortgages that were far safer and affordable, but which earn the mortgage company less profit.
In a fair and just economy, those who wrecked the economy would be paying for damage done. Their ill-gotten gains would go to making whole the victims of the housing collapse and the loss of jobs. But that's not our world. Justice only comes when we're willing to take action, and that's precisely what several local communities are doing. If these towns are successful, Wall Street will finally face a modicum of real justice.
How Communities are Fighting Back using "Reverse" Eminent Domain
Richmond, Calif., is facing the full brunt of the housing collapse. The average value of its homes has declined by 50 percent. Foreclosures and vacant houses blot its neighborhoods. The costs of policing and collecting garbage from vacant homes has increased. It was time to take action.
With the help of seasoned activists led by Alliance of Californians for Community Empowerment, (ACCE), Richmond turned to the power of eminent domain which permits government entities to claim property for legitimate public purposes as long as they pay fair market value. Often this process removes people from their homes in order to create economic develop projects and transportation routes. Not so in Richmond where the properties in question are mortgages, not homes, and the homeowners remain in their homes rather than being removed. Richmond wants to acquire several thousand underwater mortgages -- beginning with more than 600 -- by paying the Wall Street financiers the current value of those mortgages rather than the inflated bubble values. After giving the mortgage lenders a fair (determined by impartial outside appraisers), Richmond would then refinance the homes at the reduced value making them much more affordable to its residents. Richmond is partnering with a finance company that for a small profit is willing to front the money and make the new reduced mortgages. (For all the details of how this process works see an excellent recap by Mike Konczal).
Richmond's City Council, of course, would prefer to negotiate a settlement without using reverse eminent domain. They are asking the big banks and investment funds that own these mortgages to sit down with them in order to come up with a fair price. After all, the securities which contain underwater mortgages like these are being bought and sold each day at reduced values, now that they are no longer bogusly rated AAA and the real risks of predatory lending have emerged. But so far, Wall Street would rather litigate than negotiate.
Wall Street Blatant Hypocrisy
Financial giants renegotiate their loans all the time. For example, the New York Times reports (December 13) that Blackstone, the private equity giant which also is the largest U.S. private real estate owner, renegotiated billions of dollars of loans it took out when it purchased Hilton at the height of the bubble: "When they bought Hilton for $26 billion, it was like buying a very big house," said Steven Kaplan, a professor at the University of Chicago Booth School of Business. "And they financed it like a house, taking on debt."
After the economy crashed, Blackstone did exactly what Richmond wants to do: "Blackstone approached its lenders and offered to restructure the deal. Led by its global head of real estate, Jonathan Gray, Blackstone offered to buy back some of the bank debt at a discount. Some lenders received just 35 cents on the dollar."
But Blackstone, of course, has no intention of restructuring the mortgages of low-income residents. It is demanding 100 cents on the dollar, not 35 cents.
Reverse Eminent Domain Spreads to New Jersey:
In Newark, New Jersey's largest city, which sits within viewing distance of the Wall Street skyline, the City Council voted unanimously on December 4 "to begin legal research toward a program of making market-value offers on the most toxic loans and reissuing them to homeowners at the lowered amount," reports Bloomberg News. Neighboring Irvington New Jersey, which has more than 1,800 foreclosed homes since 2008, has also joined the fray. " When you hear ('eminent domain'), you usually think of people being talked out of their homes (for corporate development), but what we're trying to do is recast it so that people can stay in their homes," said Irvington's Mayor Wayne Smith (Nov. 16.)
And that's just the start. Dozens of other cities across the country have heard the news and are thinking about adopting similar strategies.
Wall Street's Insidious Counter-attack
Wall Street, of course, is going ballistic. They are doing everything they can to stop the process, from going to court (their first attempt was denied) to using their political pull in Washington to block the effort (several Senators are endorsing Wall Street's claims.) The last thing they want to see is town after town, especially those with large number of low-income victims of financial predatory lending, taking control of overvalued mortgages and knocking them down to their real value. Imagine that!
But the financial sector has many ways to counter-attack. One is to increase the finance charges on new municipal bonds that Richmond, for example, regularly needs. Citing "headline risk," buyers of these bonds are demanding higher interest rates, meaning that they are punishing Richmond for having the nerve to wage the fight, even though it has absolutely nothing to do with the municipal bond deals. In fact, by eliminating underwater mortgages, Richmond is improving town finances by removing the risk of more foreclosures and the related costs. But reason has nothing to do with driving up town's borrowing costs. Wall Street is clearly trying to punish Richmond for being so uppity. (Thankfully, the bond market is so awash with capital that Richmond is not likely to be harmed.)
Another Wall Street move is to use its political power to "persuade" Fannie and Freddie not to accept traditional conforming mortgages from Richmond home owners, which in effect would be red-lining the entire community. Such a move, however, would be highly discriminatory against minority residents and is likely a bluff. But again, the effort is designed to flex political muscle and scare the homeowners of Richmond. "Mess with us and we'll screw you one mortgage at a time, just because you live there."
Currently, the activists and leaders of these eminent domain efforts honestly believe their struggle is win-win-win for all involved. The underwater homeowners would finally get relief. The city would reduce its costs and become safer and less costly. And even the bondholders would gain because by renegotiating the underwater mortgages, the homes would be less likely to slide into foreclosure.
But unless the Tooth Fairy sprinkles pixie dust on the masters of Wall Street, the financiers will never see it this way. Rather, they believe if Richmond wins, they lose. If Richmond isn't stopped, the virus will spread and eat into Wall Street profits all over the country.
While everyone sincerely hopes Wall Street doesn't get ugly about this, the odds are high that it will use its financial power to blackmail these cities into submission. They will attempt a "capital strike" in the hopes of scaring off real estate and bond investors from doing business with the cities and towns that dare use eminent domain.
Ironically, such a strike would be impossible in North Dakota where the public Bank of North Dakota, a relic from the last populist fight against Wall Street, provides local town financing at reasonable costs. The more the Richmond movement catches on, the more it will need the public banking movement to succeed. The blackmail weapon associated with state and local finance must be taken away from Wall Street, just as in North Dakota.
More importantly, progressives need to lend their full support to this movement. Occupy Wall Street proved that Americans are fed up with inequality and the endless greed of Wall Street. But, it also showed that we need an aggressive agenda backed by concrete activities, as well as penetrating slogans like "We are the 99 percent." Well, the Richmond, Newark and Irvington crew are creating that agenda and those very concrete actions. They are demanding that Wall Street finally pay the price for its greedy and corrupt practices.
Look, all of us have spent a great deal of time complaining about Wall Street and how hard it is to take them on given all their money and political power. But here we have several cities with more in the wings actually doing something about it.
Wouldn't it be something if progressives all over the country spread this campaign to their own town councils?
That's my New Year's wish. Happy Holidays!
(This piece first appeared on Alternet.org, December 15.)
Les Leopold is the director of the Labor Institute in New York. His latest book is How to Make a Million Dollars an Hour: Why Hedge Funds get away with Siphoning off America's Wealth (Wiley, 2013)