To ameliorate the negative effects of foreclosures, some communities are creating public entities -- known as land banks -- to return these properties to productive reuse while simultaneously addressing the need for affordable housing.
States named as adopting land bank legislation include Michigan, Ohio, Missouri, Georgia, Indiana, Texas, Kentucky, and Maryland. HUD notes that the federal government encourages and supports these efforts. But states can still face obstacles t o acquiring and restoring the properties, including a lack of funds and difficulties clearing title.
Both of these obstacles might be overcome by focusing on abandoned and foreclosed properties for which the chain of title has been broken, either by MERS or by failure to transfer the promissory note according to the terms of the trust indenture. These homes could be acquired by eminent domain both free of cost and free of adverse claims to title. The county would simply need to give notice in the local newspaper of an intent to exercise its right of eminent domain. The burden of proof would then transfer to the bank or trust claiming title. If the claimant could not prove title, the county would take the property, clear title, and either work out a fair settlement with the occupants or restore the home for rent or sale.
Even if the properties are acquired without charge, however, counties might lack the funds to restore them. Additional funds could be had by establishing a public bank that serves more functions than just those of a land bank. In a series titled "A Solution to the Foreclosure Crisis ," Michael Sauvante of the National Commonwealth Group suggests that properties obtained by eminent domain can be used as part of the capital base for a chartered, publicly-owned bank, on the model of the state-owned Bank of North Dakota. The county could deposit its revenues into this bank and use its capital and deposits to generate credit, as all chartered banks are empowered to do. This credit could then be used not just to finance property redevelopment but for other county needs, again on the model of the Bank of North Dakota. For a fuller discussion of publicly-owned banks, see http://PublicBankingInstitute.org.
Sauvante adds that the use of eminent domain is often viewed
negatively by homeowners. To overcome
this prejudice, the county could exercise eminent domain on the mortgage
contract rather than on title to the property.
(The power of eminent domain applies both to real and to personal
property rights.) Title would then remain
with the homeowner. The county would just
have a secured interest in the property, putting it in the shoes of the
bank. It could then renegotiate
reasonable terms with the homeowner, something banks have been either unwilling
or unable to do. They have to get all
the investor-owners to agree, a difficult task; and they have little incentive
to negotiate when they can make more money on fees and credit default swaps on contracts
that go into default.
Settling with the Investors
What about the rights of the investors who bought the securities
allegedly backed by the foreclosed homes?
The banks selling these collateralized debt obligations represented that
they were protected with credit default swaps.
The investors' remedy is against the counterparties to those bets--or
against the banks that sold them a bill of goods.
Foreclosure defense attorney Neil Garfield says the investors are unlikely to recover on abandoned and foreclosed properties in any case. Banks and servicers can earn more when the homes are bulldozed--something that is happening in some counties--than from a sale or workout a t a loss. Not only is more earned on credit default swaps and fees, but bulldozed homes tell no tales. Garfield maintains that fully a third of the investors' money has gone into middleman profits rather than into real estate purchases. "With a complete loss no one asks for an accounting."
Not only homes and neighborhoods but 400 years of property law are being destroyed by banker and investor greed. As Barry Ritholtz observes, the ability of a property owner to confidently convey his property is a bedrock of our society. Bailing out reckless financiers and refusing to hold them accountable has led to a fundamental breakdown in the role of government and the court system. This can be righted only by holding the 1% to the same set of laws as are applied to the 99%. Those laws include that a contract for the sale of real estate must be in writing signed by seller and buyer; that an assignment must bear the signatures required by local law; and that forging signatures gives rise to an actionable claim for fraud.
The neoliberal model that says banks can govern themselves has failed. It is up to county governments to restore the rule of law and repair the economic distress wrought behind the smokescreen of MERS. New tools at the county's disposal--including eminent domain, land banks, and publicly-owned banks--can facilitate this local rebirth.
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