Last year we read about the plan of the City of Richmond California to condemn underwater mortgages to squeeze them from financial institutions and refinance them for the homeowner. Financial institutions sued and the plan was aborted. But now we read that the City of San Francisco has an idea to partner with nearby Richmond on the same program. Supervisor John Alvos was quoted in the San Francisco Examiner as saying, “The issue of distressed mortgages is real in San Francisco, data showed that there are hundreds of homes at risk right now and there are thousands more potentially at risk in the next few years. There is currently no tool available to really help these homeowners.”
But the mayor of San Francisco opposes the proposal, raising concerns about impacts to the City’s borrowing interest rates. As the article points out, it is the same banks you are going after that are buying your bonds.
A year ago, the Economist calculated that the cost of the big banks at the time was nearly $100 billion. Since then, the U.S. Department of Justice has extracted large settlements in the so called robo-sign scandal where court documents were fabricated in foreclosures. That added another $32 billion to the tab. The economy and real estate market have improved. The amount of foreclosures has steadily decreased. In 2014, the foreclosure rate for New York was .04% and nationally it was .09%. But there is little doubt that California foreclosures increased and based on the 6% increase in default notices int eh Fourth Quarter of 2013, will continue to increase. So, the proposal is not likely to go away soon.
An excellent Note was published by Katherine Roller of the Michigan Law Review on October 17, 2013 in which she concluded that while condemnation of “underwater” mortgage loans is likely constitutional under the Takings Clause of the Fifth Amendment, it would likely not survive an Article I Contracts Clause challenge. We noted the same in an earlier blog, “Mortgages- We don’t Care About No Stinking Contracts” posted on August 8, 2013.