The Housing Market and the Economy
Before the housing market crisis threatened the collapse of the American economy, housing prices formed the foundation of an apparent economic boom. Unfortunately, much of that boom was built on a bubble of speculation, in the housing market and elsewhere. When the bubble burst, the economy slid into a deep recession not seen since the days of the Great Depression in the 1930s.
The economy has technically been in recovery since 2009, and many large corporations, along with Wall Street, have enjoyed record profits and all time highs. However, many sectors, especially employment and housing, have lagged far behind. One of the major factors dragging the pace of the recovery is the high number of underwater mortgages. Unless and until America solves its housing problem once and for all, it’s difficult to imagine an economy that truly feels like a recovery for everyday Americans.
While a long term solution does not seem to be at hand, there are programs in place to ease the burden for struggling homeowners. The Making Home Affordable Program and a homeowner bailout program jointly administered by Fannie Mae and Freddie Mac approach the program on the federal level. In the meantime, some local governments have taken matters into their own hands, offering eminent domain as a possible way out for homeowners trapped by underwater mortgages.
Underwater Mortgages Defined
The term underwater mortgage accurately defines the circumstances that trap many homeowners: they owe more on their mortgages than their houses are worth. In many cases, mortgages were obtained at the peak at the housing bubble, when market values were drastically inflated. Since the housing market crash, housing prices in many markets have taken a nosedive. Although there has been some recovery in recent years, there is no expectation that prices will ever regain their pre-crisis heights.
Making the problem worse in some cases are high interest rates on the mortgages homeowners are stuck with. Although as of 2013, mortgage interest rates are at all time low levels, homeowners who are underwater lack the equity that is traditionally necessary to qualify for a loan modification. In plain English, homeowners with underwater mortgages need help to be released from their dilemma.
Young Homeowners and Underwater Mortgages
As of the second quarter of 2012, approximately one-third of mortgages were underwater, according to a report issued by real estate company Zillow and reported by CNN Money. A particularly alarming statistic from the report was that 48 percent mortgage holders under age 40 were saddled with underwater mortgages. This situation creates ramifications that affect individual homeowners and the overall economy alike.
These young homeowners frequently have growing families, which would ordinarily mean that they would be shopping for larger homes. However, because they are stuck with underwater mortgages, many would-be homebuyers looking to move up are staying put because they cannot afford the financial and credit hit from a short sale. Others remain in their homes hoping to recover enough value to erase their negative equity. As a result, first time buyers seeking “starter” homes are faced with an artificially tight market.
Making Home Affordable Program
The Making Home Affordable program, instituted by the Obama administration, is designed to allow struggling homeowners to gain financial relief. The far reaching program has options available for veterans, homeowners who have lost their jobs and homeowners who have FHA loans as well as help for homeowners with conventional mortgages whose homes have lost significant market value. While these programs have provided much needed relief to some families, others have been frustrated by the process of attempting to navigate the complicated application requirements.
Fannie Mae and Freddie Mac to the Rescue – Sort Of
Strategic default is the process where homeowners deliberately walk away from their mortgages. Although the phenomenon is not new, strategic default gained prominence in 2008, when they accounted for 17 percent of all foreclosures. In response to strategic default and the continuing high number of underwater mortgages, Fannie Mae and Freddie Mac announced plans to allow some homeowners to seek relief through simplified channels – either through short sales or mortgage release.
A short sale allows homeowners to sell their homes for less than the price of their mortgages, relinquish the home and be relieved of any further financial obligation. A mortgage release allows homeowners to relinquish the home without a short sale while still being released from further obligation to make mortgage payments. Both programs involve significant hits to homeowners’ credit scores, but spare them the pain of a protracted foreclosure process.
Local Government and Eminent Domain
Some local governments aren’t waiting for the federal government to get its act together. They are exploring various versions of eminent domain – not to evict struggling homeowners, but to help them remain in their homes. Under these proposed programs, local government entities would go to court to obtain approval to pay “fair market value” for homes where homeowners are underwater – prices which would often be far less than what the homeowners still owed. After obtaining the property, the governmental agency would offer to resell the home to the homeowner for a drastically reduced price, who would obtain a new loan to finance the purchase. Not only would such a program help homeowners remain in their homes, it would reduce the prospect of unsightly blight (and potential crime) associated with properties left empty by bank foreclosures.
For Further Reading
- American Public Media, David Lazarus: Fannie, Freddie to Let Some Homeowners Walk Away
- Bright Hub, Audrey F. Henderson: Understanding the Econonmic Impact of the Housing Market
- CNN Money, Les Christie: Half of Mortgage Borrowers Under 40 Are Underwater
- Deseret News, Editorial Opinion Post: In Our Opinion, Underwater Mortgages Dragging Down the Economy
- NBC News Economy Watch, John B. Schoen: Governments Mull Radical Solution to Underwater Mortgages – Seize Them
- NBC News Economy Watch, John B. Schoen: One in Three Mortgage Holders Still Underwater
- NPR, Tamara Keith: Walking Away from the House She Can Afford
- Think Progress, Julia Gordon: No, the Government Isn’t Launching a New Bailout Program for Underwater Homeowners
- U.S. Department of the Treasury and U.S. Department of Housing and Urban Development: Making Home Affordable
The Evolution of the Occupy Movement
Whatever else its participants may or may not have accomplished, the Occupy movement has changed the national conversation from austerity cuts and deficits to acknowledging injustice and resolving financial and social inequality. What began as a loosely organized string of gatherings has evolved to address issues ranging from Wall Street reform to cuts in mental health care.
Another injustice that Occupy has been speaking out against has been the ongoing housing and foreclosure crisis. In conjunction with this cause, and as an adjustment to forcible removal from public spaces by law enforcement, the movement has evolved to Occupying abandoned properties and homes of families facing foreclosure as an act of civil disobedience. For instance, in Chicago, a coalition between the Chicago Anti-Eviction Campaign and Occupy Our Homes recently set a goal of renovating 100 abandoned homes for homeless families and households here in the city.
Outlining the Proposal
As I observed this phenomenon, I started thinking about how ironic and ridiculous it is that there are properties standing empty while families and individuals are homeless. I began to consider what would be involved in Occupying vacant and abandoned buildings – legally – as affordable housing for homeless families and individuals or for households caught up in the housing crisis. I submitted a proposal for a presentation for the 2012 Chicago Green Festival with the working title “Sustainability and Affordable Housing: Maybe Occupy Is Onto Something.”
I began drafting an outline of the logistics involved in creating a public-private partnership between governments, social service agencies, financial institutions and even would-be residents. The list below represents some of the elements that (in my opinion) would be necessary to make a plan like this happen.
- Collaboration between city governments, social service agencies and local communities to match Chicago-area families and individuals who need housing with vacant housing stock
- Development of a network of mortgage lenders and rental assistance resources to assist households in affording rents or mortgages
- Recruitment of building and construction companies to provide needed retrofits and repairs to structures not fit for habitation
- Provision of support services such as employment assistance and financial counseling to individuals and families after placement in their new homes
Admittedly, this list represents a blue-sky proposal that may seem totally out of reach. However, Chicago has a demonstrated history of taking on major projects and of accomplishing enterprises that require public-private cooperation. The ongoing Plan for Transformation being conducted by the Chicago Housing Authority has tasked itself with nothing less than relocating all of its residents from isolated and often dilapidated public housing complexes into economically integrated developments and rehabilitated public housing units, while providing relocated residents with wrap around social services. Millennium Park, a jewel located on the lakefront in the heart of downtown Chicago, represents what the determined collaboration of public-private projects can accomplish.
There is also precedent for similar programs outside of Chicago that have focused on restoring abandoned structures for much-needed affordable housing or restoring homes to distressed homeowners. In Boston, New York City, San Diego, Richmond and Portland, Oregon collaborative arrangements between municipalities, social service agencies, and in some cases, hardworking individual households were able to transform vacant properties into viable affordable housing or to allow homeowners facing eviction or who had been evicted to remain or return to their homes. The programs are listed below:
- Richmond, Virginia Neighborhoods in Bloom Initiative
- Portland, Oregon Smart Growth and Affordable Housing
- San Diego Strategic Framework Process
- Project No One Leaves – Boston
- Urban Homesteading Assistance Board and Lower East Side People’s Homesteading Coalition – New York City
The programs in Richmond, Portland and San Diego focused on revitalizing vacant properties. In New York, the program was initially an Occupy-type operation where residents performed a lot of repair work on properties to which they were not legally entitled to live, however, the program eventually gained the blessings of the city. Boston’s innovative program involved purchasing foreclosed homes and allowing the former owners to repurchase the homes, often for much lower monthly payments than the residents had previously been required to pay.
Chicago: Identifying Needs and Challenges
However, I was unable to find information about a similar program in Chicago, although housing activist movements such as the Contract Buyers League existed in the Windy City decades before Occupy came into existence. It isn’t that the need for such a program doesn’t exist. Chicago has been hit hard by the ongoing recession and housing crisis. Neighborhoods with high poverty rates were hit especially hard, as the first graphic, Communities In Need, adapted from the Vacant and Abandoned Property Finder: Chicago website, developed by Derek Eder, illustrates.
In addition, many vacant properties are located in wards where there are high rates of poverty, as the second graphic, Vacant Property Locations, also adapted from the Vacant and Abandoned Property Finder: Chicago website illustrates. Many of the vacant properties on this chart represent foreclosed homes. While this phenomenon reflects the fact that these areas have been disproportionately affected by the foreclosure crisis, it also means that available housing is potentially available precisely where it is needed most.
A major challenge to enacting such a proposal is the fact that a lot of vacant properties have been allowed to deteriorate to the point that they are uninhabitable. Evidence suggests that lenders may allow deterioration to occur to a greater extent in foreclosed properties in poor neighborhoods or in neighborhoods inhabited primarily by people of color. That said, the deterioration problem may potentially decrease as a result of two pieces of recently enacted legislation: a City of Chicago statute passed in July 2011 and revised in November 2011, and the Cook County Vacant Building Ordinance, passed in February 2012. Nonetheless, many vacant properties would need extensive work done by professionals before they could be safe enough to allow volunteers or intended homeowners or renters
to invest sweat equity in to renovating what would become their homes. Otherwise, the potential for serious legal liability exists.
Another potential roadblock would be the actual acquisition of vacant or abandoned properties. In some instances, properties are vacant because families have been forcibly evicted, but the foreclosure is still in dispute. It’s always preferable to empower families who wish to remain in their homes to be able to do so, and the Legal Assistance Foundation of Metropolitan Chicago is one program that assists families in doing so.
For abandoned properties, or properties where it is impossible for their former owners to retain or regain possession, there needs to be a way to ensure that the properties involved were truly available for sale or rent. A complication in making this determination is the fact that many foreclosures are done by national and international companies. In some cases, bundling and other exotic financial instruments have made it nearly impossible to determine who – or what lending entity – actually holds title to a particular property. Other challenges to implementing a legal Occupy program are outlined below:
- Zoning issues and NIMBY-ism
- Abatement of lead, asbestos, mold and other toxic materials
- Obtaining cooperation from banks and lenders to sell or rent properties
- Coordinating government, business and social service resources
Occupying Non-Residential Properties
Another issue promoted by the Occupy movement is resolving economic inequality. While relocating families and individuals within their own neighborhoods if they desire to stay is often beneficial, it’s also important to promote economic integration wherever possible by allowing families and individuals to relocate away from areas with high poverty levels. This idea is a major driving force behind the creation of mixed income communities developed by the CHA through its Plan for Transformation.
Other opportunities to promote economic integration exist by Occupying vacant non-residential structures that may lend themselves conversion to housing stock. The term “grayfields” has been used to describe such structures. Unlike brownfields that are often contaminated by toxic substances, grayfields may be associated with zoning ordinances that make it a challenge to convert them to residential use. Nonetheless, it’s both truism and truth that it’s more sustainable to reuse an existing building than to build another.
In Chicago, Prentice Women’s Hospital, designed by renowned Modernist architect Bertrand Goldberg, represents a unique potential opportunity to preserve an architecturally significant structure by converting it into a mixed use development that could include affordable housing. Of course, it may not be structurally, logistically or financially feasible to accomplish such a conversion, although the option has been one of many under discussion for the disposition of the vacant hospital building. It would also not be the first architecturally significant building converted to housing in Chicago or elsewhere.
Developing vacant properties like Prentice Women’s Hospital for affordable housing would allow moderate income families to enjoy the amenities of affluent neighborhoods like Streeterville located close to the center city and public transit. And as the H + T Affordability Index developed by the Center for Neighborhood Technology shows, higher prices for housing are somewhat more affordable in areas where there is less need to own or maintain a car.