Seattle mulls taking over private mortgages to fight foreclosures

SEATTLE - If the threat of losing your home isn't painful enough, imagine also losing the very same place you earn your livelihood. Kathy Yasi, an in-home childcare provider, has seen it happen to several daycare owners in her Central District neighborhood.

"Her landlord wasn't paying the mortgage, and one day they just took the house away," Yasi says. "So she lost her house where she and her family lived, she lost her business, her source of income and all the other children in her home lost their childcare."

Right now, Yasi isn't facing foreclosure herself but she knows at any time anything can happen. That's why she's following this issue very closely, especially after learning Seattle city leaders are reviewing a number of foreclosure mitigation strategies, including eminent domain, as a means to help struggling homeowners get access to more affordable loans.

Eminent domain gives state and city governments the power to take possession of private property -- including mortgages -- for public use. It's a tool which traditionally hasn't excited homeowners who have been forced to sell their property to make way for new roads or new commercial developments. But recently members of the City Council's Housing, Human Services, Health and Culture Committee heard how eminent domain could be used to actually keep homeowners in their homes during a presentation by Robert Hockett, a professor of financial law at Cornell Law School.

The city hired Hockett last spring to analyze and review the causes of Seattle-based foreclosures and practices of lenders. The council also asked Hockett to explore legal options city leaders have access to that help low-income homeowners at risk of losing their homes due to underwater mortgages.

"We have a problem and we need to fix it," says Councilmember Nick Licata, chairman of the Housing, Human Services, Health and Culture Committee. "The committee intended to see if loan reduction is a viable strategy, and we are looking at several tools for achieving it."

While data is mixed on exactly how many homes in the Seattle area remain underwater -- meaning the owner owes significantly more than their homes are worth -- Licata says using the most conservative figures available at least 10,000 to 15,000 homeowners continue to struggle to pay their mortgages and are facing the threat of foreclosure.

"Seattle, early on, had fewer homeowners underwater," Licata says. "But contrary to the national trend, our numbers have increased while the nation's numbers are decreasing."

Licata says one of the reasons Seattle is now seeing foreclosure numbers rising is what happened during the onset of the recession when the state and city worked with programs that encouraged loan extensions. This idea may have helped homeowners in the short run, but Licata says it only put off the problem.

The goal of Hockett's report, according to Licata, is to focus on long-term solutions for struggling homeowners. One such strategy looks at principal loan reduction -- targeting the negative equity of a loan -- in order to keep people in or returning to their homes.

To achieve principal reduction, Hockett proposed several tools legally available and ready for use by city leaders, including eminent domain.

"I was surprised by how simple and clean he made it sound," Licata says.

City leaders in Richmond, Calif., have been working on this exact idea - looking to invoke eminent domain to buy more than 600 mortgages from investors at the current market value. The city would then modify the loans and give the homeowners access to more affordable payments.

Seattle has been watching this idea unfold in Richmond with peaked interest. But, critics argue using eminent domain as a means of achieving loan reduction and getting rid of negative equity could make getting mortgages harder and more expensive across the country.

Licata says it's also important to consider how some might view public officials getting involved in private home-ownership.

"Images of nationalization of private property come to mind in the worst case scenario," he says.

But Re-Set Seattle, a coalition of 30 community, faith and labor organizations, is pushing city leaders to seriously consider using eminent domain as a means of foreclosure mitigation.

Licata says councilmembers will spend the next few months looking over Hockett's report. He says further information is needed to determine if principal loan reduction is a viable strategy for Seattle to pursue, and that means having more discussions and learning more about each of the ways it can be achieved, including the use of eminent domain. Licata says the committee will work with the city attorney, budget office and other councilmembers as they move forward on this issue.