Friday, October 24, 2014

San Francisco Mortgage Eminent Domain Plan - A Look at the Target Properties

On October 28, San Francisco Supervisors will consider forming a Homeownership Stabilization Authority with the city of Richmond. The Authority would have the ability to condemn residential mortgages as a way of keeping financially distressed owners in their homes. The focus would be on underwater properties with mortgages held in private loan securitizations; federally owned or guaranteed mortgages would be excluded.

I was surprised to learn that San Francisco has a problem with underwater mortgages. According to Zillow, the median home price in the City by the Bay peaked at $822,000 in 2007, bottomed out at $667,000 in late 2011, and has now reached $979,000 - 19% above the pre-recession high.

The Board of Supervisors' resolution states that San Francisco has approximately 300 underwater mortgages in private loan securitizations and that these are concentrated in "historically Black, Latino and Asian working class communities." 

Supporting documentation in the Supervisor's agenda packet includes a memo from ACCE Action stating that 279 San Francisco mortgages have LTV (loan-to-value) ratios of 107% or more. The memo breaks these mortgages down by zip code - with the highest concentrations in 94112 and 94124.

These two zip codes are in less affluent sections of the city where real estate prices have not performed as well as they have in the "hottest" neighborhoods.  That said, property in these zip codes is not seriously depressed by historical standards. In 94124 - which has seen the worst price performance - Zillow shows a median home value of $609,000 compared to a pre-recession peak of $635,000. Further, Zillow forecasts that within a year, the median will reach $636,000 - roughly equaling its previous peak. In 94112, Zillow only reports selling prices per square foot, and these have fully recovered from the recession.

Looking Beneath the Cover - Examining the Data

To learn more about San Francisco's underwater mortgages, I filed a public records request with the Mayor's Office of Housing and Community Development.  They provided the 279 mortgages in an Excel file along with other lists and correspondence.  There is a lot of material to work through, but I thought I would share some initial findings.

First, unlike in the case of Richmond, there are no property addresses, so it will not be possible to map the properties unless and until the list is matched against a public records database. CoreLogic and some other companies perform this sort of matching, but normally charge substantial fees for doing so.

Still, the file does contain information that should raise some eyebrows. For example, 47 of the 279 properties have current estimated values in excess of $1 million. Many of these are 2-4 unit properties, but there are 18 condominiums and single family houses in the million dollar-plus category. One home has an estimated value of $8.65 million after being originally appraised at $12 million.

Perhaps the biggest surprise is the number of loans that have been modified. According to the Board's resolution, homeowners whose loans were sold into private label securitizations "are unable to access many of the foreclosure prevention programs available to other struggling homeowners". Yet the data tell a different story:  129 of the 279 mortgages have had some kind of modification, such as principal reduction, interest rate reduction or additional time allowed for repayment. In many cases, multiple features of the mortgage were modified.

The resolution also notes that the vast majority of private label securitizations have "predatory" features. The features identified as predatory include negative amortization, interest only, balloon payments and adjustable rates. While I agree that negative amortization loans can be objectionable, I don't consider all these attributes to be necessarily predatory. Like many financial professionals, I have taken out ARMs on multiple occasions, and I never felt exploited. Indeed, since base interest rates are sharply lower than they were in 2007, it is likely that most ARM borrowers are paying little more than the original interest rates they incurred at origination. Of the 279 underwater San Francisco mortgages, 203 bear current interest rates of 4% or less - hardly predatory. Half of the universe consists of ARMs and another 49 are fixed rate.

Finally, it is worth noting that the vast majority of the underwater homes have multiple liens. In 244 of the 279 cases, the Combined LTV Ratio is different from the LTV Ratio, suggesting the presence of second and third mortgages. If one of the other liens is federally backed, the Authority may be challenged to liquidate the private mortgage while leaving the government mortgage intact. 

Undoubtedly, some San Francisco homeowners were sold predatory mortgage products by unscrupulous financial institutions. In some cases, these individuals may still be underwater because their homes were aggressively appraised or they live in neighborhoods with less robust price appreciation.

That said, we have yet to see a pool of mortgages that reliably falls into these categories. If the City cannot identify a set of mortgages that is fit for condemnation, the joint powers authority might benefit some undeserving homeowners - like the one with the $8.65 million house mentioned earlier. Further, if only a few dozen mortgages really do need to be liquidated, it is likely the City can find more cost effective means of doing so than through the use of eminent domain.


Marcy Berry said...

Excellent article, pointing to the lack of solid economic facts in this legislation. The call to expand eminent domain into the area of lending has little to do with the economic facts of the case. Here in San Francisco, the subject was introduced by Supervisor David Campos over a year ago accompanied by fanfare but not much else. Supervisor Avalos' resolution followed a few months ago, hurling invectives at "predators" but offering no solid "general welfare" benefit. However, apart from the eminent domain issue, what also needs to be of concern is formation of the "Authority." Such entities become untouchable and unreachable, lacking elected representatives, or responding to local will.

Fran├žoise Fielding said...

As the previous commenter pointed out, the call to expand eminent domain into this area of lending has little to do with the facts.
Furthermore it will just make things worse.
It will make it very difficult to get mortgages in the affected areas and might even trigger a downward spiral in the price of homes in the areas the legislation purports to help. Under the circumstances why would anyone want to buy a loan in such an area or keep it in their portfolio? Those investors who do remain will have to factor in an unpredictable risk which will only lead them to raise the price of credit and make it even more unavailable to many.

Starchild said...

I agree with Marcy and Francoise -- great research, Marc!

A couple small corrections -- there appears to be a "%" missing after "49" in the line "Half of the universe consists of ARMs and another 49 are fixed rate." Also you might want to spell out Adjustable Rate Mortgages the first time you use the term instead of just using the acronym.

Nevertheless, very solid piece. "Predatory lenders" seems like another one of these poorly defined terms used to demonize people and raise all kinds of irrational fears, without the burden of having to provide any actual evidence, like "sex trafficking", "greedy speculators", and "disturbing the peace" to name a few notorious examples.

Among other things, the facts seem to suggest that in many caess the city government might be able to protect people's ability to stay in their homes by simply waiving property taxes in cases where people are struggling with their mortgages, and avoid a lot of extra work and expense and litigation over trying to push through eminent domain proceedings.

Marc Joffe said...

Thanks Starchild. There are 49 fixed rate mortgages in the pool of underwater mortgages. 139 are ARMs and 90 are Negative Amortization loans. Since this is a financial industry blog, we often assume that readers are familiar with industry lingo.