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Mortgage

Eminent threat: What our cities can do to speed the recovery?

Regardless of what any national firm or the federal government might wish, real estate always was and always will remain a local business, ruled by players on a local scale. No amount of federal legislation or federal regulatory oversight will change this.

If that were different, then some federal bureaucracy could, at the stroke of a pen, legislate an economic recovery. Though many a Capitol Hill lifer may pretend that they have this power, they do not.

The United States is arguably the most mobile of any country on Earth — save those nomadic folk who are forced to wander in search of fresh pastures and those poor souls forced to flee their country to avoid death at the hands of a rival tribe. We move our families when we want. We shift to cities or suburbs that offer the amenities we seek and the homes priced in a range we can afford. The cities that provide the best prospects for work and a happy life attract the most residents. Those places that can’t produce the goods fall into decline.

Finally, after years of economic misery brought on by all the things you’ve been reading about for the past five years, we are seeing the glimmers of a U.S. economic recovery. If it grows stronger — and no one is sure that it will — we’ll have made our way through a housing recession in half the time it took the Japanese to work through their recession woes. A lot of folks are watching the numbers with their fingers crossed. The people watching it most closely are the mayors of our great cities. They’re watching to see who will come out on top when we finally make it into full recovery. They’re hoping it’s going to be their towns. 

Every month, we see the S&P/Case Shiller numbers come out, telling us what cities are seeing their real estate values come back quickest. To be sure, I’ve heard as many people say those numbers are erroneous as those who believe in them. Still, mayors up and down the country must be wondering what they can do to get their cities higher up on that list of improving metropolitan areas.

So many local factors go into determining the value of the real estate in a particular city. But when too many factors fall into negative territory, it starts to create a slope that can be very difficult to climb. If jobs disappear, people go into default and lose their homes. Every home that’s lost in a community drives down the value of all of the others in that neighborhood. You can call in the federal government and try to modify the mortgages, but if the jobs don’t come back or too many homes have been lost in the area, you just might not win that fight. 

Detroit Mayor Dave Bing knows what I’m talking about. But to his great credit, he’s been out on the streets with the heavy equipment operators, tearing out old multifamily projects, slashing and burning in an attempt to reap a new harvest in the future that just might keep his town alive. It’s a fight I hope he wins, but his slope is steep.

Authorities in North Las Vegas, Nev., and Richmond, Calif., have been meeting late into the night, looking for solutions to their own problems: an overwhelming number of underwater homeowners in their jurisdictions. Despite the fact that fewer mortgage holders are delinquent, about 20% of all borrowers still owe more than their homes are worth. Many of these underwater borrowers are localized in communities that were hard hit and slow to recover. They’re on the slope and slipping.

Municipal leaders in these communities would like the investors holding the paper on their residents’ homes to sell it to them at a discount and, failing that, are considering trying to take the properties using eminent domain. Desperate times call for desperate measures.

The Nevada town has rejected the use of eminent domain. It’s just as well. Richmond may press forward, despite the warnings of the federal government as delivered by the Federal Housing Finance Agency. The FHFA has said — in no uncertain terms — that seizing these homes would result in an embargo of any future mortgage financing through Fannie Mae or Freddie Mac. You can save the borrowers in trouble today, but they’ll be the last borrowers of conventional mortgages your town ever sees. That’s a pretty strong threat. It’s a death threat.

You could call it a case of big government against hard-working local folk. But the truth is there are a lot of other folks already tied up in these deals — investors and pension funds that have tied up the savings of other hard-working local folk in assets secured by mortgages that Richmond municipal authorities would like to see just go away. It won’t happen. It can’t happen.

So what can our cities do to help property owners and speed the rate their real estate appreciates? It’s not an answer they want to hear, but here it is: Do what you do. Keep your cities clean and crime-free. Woo new businesses to create jobs. Build parks and libraries, and pay attention to the quality of your schools. Give your residents a reason to feel like your town is their home. Give your real estate agents something to sell. But stay out of the home financing business. That’s no longer a problem you can solve at the local level.

Yeah, there have been abuses, but the time for solving those problems has now passed. You were too busy making money on new housing permits, recording fees and property taxes during those years to deal with lenders selling mortgages to folks who couldn’t afford them. The federal government is handling that now and they’ve swung that pendulum just about as far in the other direction as it can go.

The best thing you can do now is focus on your own work. And when it comes to dealing with the real estate mess, stay out of the way, quit slowing down the foreclosure process and help the residents who are losing their homes transition back into rental units. Anything else you do is just slowing down the recovery. 

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