If you own a home in San Francisco, or one day would like to try, you soon might have more to worry about than skyrocketing housing prices. The Board of Supervisors will likely vote Tuesday on whether to approve a policy enabling it to seize mortgages through eminent domain. The resolution would allow The City to explore partnering with Richmond to seize mortgages at less than market cost through eminent domain and rewrite them at lower value.
At first glance, this would seem to create instant equity for underwater homeowners. But with a closer look, it's clear that the policy will make it significantly more expensive to buy, sell or refinance a home in San Francisco — already one of the nation's most difficult housing markets.
I've lived and worked in our area, including Richmond, my entire life, and as somone involved in small business, I know how important the housing market is to our economy's health. I want the best for our community, and this plan is a foolish effort that isn't even designed to help struggling homeowners. We can do better.
How would this hurt our housing market? Lenders exposed to eminent domain risk would be forced to price not only the risk of borrower default, but also the risk of future price declines. As a result, lenders would require much larger down payments and charge higher interest rates to compensate for this new risk. The result would be that all future homebuyers, and homeowners seeking to refinance, would be forced to the bear the costs of an ill-conceived policy. The only real impact of this public policy will be to push housing affordability farther away from middle-class San Franciscans.
But this bad idea keeps on giving. The damage will not be limited to the local housing market. Proponents of this plan argue that loans will be seized from big banks or Wall Street investors, but in reality, the securities that these mortgages were put into are held in retirement accounts or college savings plans owned by middle-class families and teacher, police and firefighter pensions. That is why the California Public Employees' Retirement System, which holds approximately $11 billion in mortgage-backed investments, has gone on the record with its strong concerns.
The so-called necessity for the program is built on the false notion that vast numbers of San Francisco homeowners would be eligible for eminent domain. But it would target a narrow percentage of underwater mortgages, focusing only on those held by private-label, mortgage-backed securities. From this group, only homeowners with good credit who are current on their mortgages, who have no existing home equity loans or property liens would be considered. Importantly, as of first-quarter 2014, CoreLogic reports that fewer than 2 percent of homeowners with mortgages in the San Francisco-Redwood City-South San Francisco area have negative equity — and only a fraction of these borrowers might be eligible for the proposed program. The resolution itself suggests that just 300 borrowers are underwater and have their loans held in private-label securities — roughly one-tenth of 1 percent of all San Francisco mortgages. And the program clearly does not target struggling homeowners, making it likely that the number eligible would be far fewer than 300. In the end, the program would only further enrich investors and raise the cost of borrowing for everyone.
The simple fact is that this is an untested and legally dubious plan. Even if enacted, we are all but guaranteed a lengthy and costly legal battle. Federal regulators have expressed grave concerns and warned they would have to take aggressive action if a city moved forward with an eminent domain program.
The Board of Supervisors should focus on efforts that will help support our housing market and grow our economy, and reject this for-profit scheme that won't help struggling homeowners and will come at a steep cost to middle-class families. San Franciscans can spot a bad deal when they see one.
Christopher M. George is chairman of the California Mortgage Bankers Association.