IF YOU LIKED Occupy Wall Street - or if you liked its message but not its disruptive tactics - you'll love what's happening in Richmond, Calif. No, folks aren't pitching tents in the parks or marching in the streets to protest banks' predatory practices. Instead, in this blue-collar city of 103,000, local officials - with support from residents and community groups - are demanding that banks sell their portfolio of "underwater" mortgages to the city so that it can make them more affordable for local homeowners. If Richmond succeeds, many other cities are likely to follow its example, which has Wall Street up in arms.
Since 2007, when the speculative housing bubble burst, home prices have plummeted across the country. Homeowners have lost more than $6 trillion in household wealth. Almost 10 million American families - about one-fifth of all homeowners with mortgages - owe more on their mortgages than their homes are worth. Many are at risk of joining the 5 million Americans who've lost their homes to foreclosure.
The blame for this predicament lies almost entirely with Wall Street's risky, reckless and sometimes illegal lending practices. Banks targeted working-class and minority areas, often pushing borrowers into high-interest subprime loans, even when they were eligible for conventional mortgages. Not surprisingly, the nation's worst underwater "hot spots" are disproportionately black and Latino areas.
One of those places is Richmond, where home prices have plummeted by 58 percent since 2007. Thousands of homeowners have lost their homes. Nearly half of remaining homeowners are underwater. The city has lost millions in property-tax revenues, leading to cuts to vital services and infrastructure repair.
Most economists agree that the best solution is for banks to modify mortgages to their current market value, an approach called "principal reduction." If underwater mortgages were reset to fair market values, it would help homeowners and communities alike, and pump about $102 billion into the economy annually, according to a Home Defenders League report.
But homeowners who have asked banks to modify their mortgages typically get a cold shoulder or a bureaucratic runaround. Some of the nation's biggest banks signed a settlement agreement with state attorneys general to modify mortgages, but they've failed to comply, leaving millions of homeowners to fend for themselves. And so far, the Obama administration has been unwilling to require intransigent banks to reset loans.
Faced with this quagmire, cities began looking for ways to take matters into their own hands. Recently, Richmond sent notices to the holders of more than 600 loans, asking them to sell their underwater mortgages at the fair market value as determined by a third-party appraiser - in the same way that banks routinely buy and sell mortgages to each other. If they refuse, the city will purchase the mortgages using eminent domain, which they routinely use to purchase property for sidewalks, infrastructure, school construction and other projects. The city will repackage the mortgages to homeowners at reduced prices and mortgage payments.
Contrary to what Wall Street lobbyists and their allies claim, no city funds will be used to purchase the mortgages. This will be done with a private firm, Mortgage Resolution Partners, which has agreed to a set of principles established by community leaders and the city government.
Richmond may be first, but other cities - including Seattle; San Francisco; El Monte, Calif.; and Irvington, N.J. - are preparing to follow Richmond's example. Wall Street is fighting back. Two large banks, Wells Fargo and Deutsche Bank, filed a lawsuit to thwart the Richmond plan, but U.S. District Judge Charles Breyer last month declined to grant an injunction. Bank lobbyists also warned local officials and residents that if they go through with the plan, banks will increase the cost of future borrowing or even shut down credit entirely, but the Richmond City Council called their bluff and voted to move ahead with the plan.
Wall Street lobby groups have tried to get Congress - so far, without success - to block local cities from using eminent domain for this purpose. But they did manage to persuade the Federal Housing Finance Agency (FHFA) - run by Ed DeMarco, a Bush holdover who is in the job until Congress confirms Rep. Mel Watt, whom Obama nominated for the post - to threaten to sue and withhold credit from Richmond and other cities that adopt this approach.
But their ploy could backfire, because FHFA's threat not only exceeds its own authority (it lacks jurisdiction over cities), but violates federal antitrust and anti-discrimination laws. Likewise, the banking industry's threats to cut credit would be another form of illegal "redlining" and abuse of market power.
If enough cities adopt the Richmond plan, Washington might wake up and require banks to modify millions of mortgages. Meanwhile, Richmond - 3,000 miles west of Zuccotti Park - has found an innovative way to occupy Wall Street.