Steven Gluckstern says cities can save struggling homeowners by seizing their loans from lenders. First he has to convince one of them to take on Wall Street.
Josh HarkinsonJan. 7, 2013 7:01 AM
On a drizzly November morning, Steven Gluckstern speeds through the half-empty subdivisions that spread out for miles as you head east from San Francisco into California's Central Valley. Taking the exit in downtown Merced, a small city that's hit hard times, he passes a grizzled panhandler holding a sign that says, "Will work to get out of Hell." The 61-year-old venture capitalist taps the steering wheel of his Volkswagen SUV and hums along to "Like A Rolling Stone," getting himself psyched up to make his pitch.
He parks and bounds into Merced's modest city hall to speak to a small gathering of city council members, realtors, and housing activists. "If we sit around and wait for the solution to come from Washington, DC, or Sacramento, it will not come," Gluckstern tells them between deep dives into stats on underwater mortgages, negative home equity, and loan default rates. "It will not come! It hasn't come in five years."
Merced, whose foreclosure rate is twice the national average, is just the latest stop as Gluckstern crisscrosses California to sell struggling cities on a radical, untested way to fix the mortgage crisis. His scheme is almost as complicated as the derivatives and collateralized debt obligations that caused this mess to begin with. However, its underlying mechanism is simple: Cities should use the power of eminent domain to seize troubled mortgages from the bondholders that own them.
Steven Gluckstern in his San Francisco office
That's where Gluckstern's firm, Mortgage Resolution Partners, enters. It would arrange the funding for these eminent-domain purchases and then help a city like Merced reduce the loans' principal and resell them to new investors, who'd cover the city's costs and MRP's brokerage fee. In this scenario, Gluckstern calculates that a family in Merced that bought a $200,000 house that's now worth $100,000 (a common situation here) would see its monthly payments decrease from between $800 to $300.*
"Everybody is better off," Gluckstern says as he clicks through slides detailing how preventing a single foreclosure could save the city nearly $20,000 in lost taxes and other expenses. "Grandma is better off because she stays in her house. The community is better off because you avoid all of those costs." It's also a good deal for the investors who own the mortgage, he continues: "But you know something? Even the owner of that mortgage is better off, because that's otherwise going to be a foreclosure. And we know there are 8 chances out of 10 that they are going to be foreclosed!"
Even as housing prices slowly rebound across the country, the situation in California's Central Valley is not unique. Four million Americans have lost their homes since 2005, and 3 million home loans are currently at or near foreclosure. Moreover, 12 million borrowers collectively owe $600 billion more than their homes are worth, a debt load that threatens to stall the shaky economic recovery.
Dozens of cities and counties have expressed interest in pursuing the eminent domain option with MRP, including Chicago, Berkeley, and New York's Suffolk County, though nobody wants to be the first to try it. Last April, officials in California's San Bernardino County appeared ready to work with MRP until the securities and banking industries bombarded them with threatening letters. Last month, the central California farming town of Salinas quietly solicited a bid from MRP, but has yet to pull the trigger.
Former San Francisco Mayors Gavin Newsom
and Willie Brown are among Gluckstern's
influential Democratic allies. Thomas Hawk/Flickr
Politicians are understandably reluctant to resort to what is essentially the nuclear option for rescuing beleaguered homeowners. In August, the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, posted a notice expressing its "significant concerns about the use of eminent domain to revise existing financial contracts." In September, the Securities Industry and Financial Markets Association warned that any city that seizes a loan will face a crippling legal battle as well as a "chilling effect" as banks hike interest rates or pull up stakes entirely.
The hesitancy may also have something to do with Gluckstern and his partners, who, after all, have a lot in common with the bankers they're supposed to be fighting. MRP's CEO, Graham Williams, is the former director of residential lending for Bank of America, and Gluckstern's investors include Donald Putnam, who once managed $15 billion in mutual funds. His allies include business-friendly Democrats such as former San Francisco mayors Willie Brown (an MRP investor) and California Lt. Gov. Gavin Newsom. MRP spokesman Peter Ragone previously served as Newsom's spokesman. MRP's team also includes a prominent real estate developer, the founder of Ask Jeeves, and a former legal affairs secretary for California Gov. Jerry Brown.
In response, Gluckstern's foes in the finance industry are fighting him with rhetoric that sounds like something from an Occupy protest. Writing to San Bernardino officials in July, the Association of Mortgage Investors described MRP's eminent domain scheme as "simply a wealth transfer from everyday Californians to a handful of wealthy, well-connected investment bankers."
Gluckstern's approach isn't as in-your-face as it may sound. In early 2008, the Obama administration considered a bottom-up fix to the foreclosure crisis that had a lot in common with MRP's proposal. The federal government had bailed out the banks but liberal economists were arguing that it also needed to bail out millions of homeowners struggling to stay afloat. Last year, the White House finally began warming up to that idea. But it has stood by as Edward DeMarco, FHFA's acting director, has ignored the entreaties to forgive debt on government-owned loans.
The eminent domain plan was the brainchild of Robert Hockett, a Cornell law professor who specializes in the securitized mortgage market. Hockett originally wanted the government to use its power of eminent domain along with money from the Troubled Asset Relief Program to go after underwater mortgages owned by private investors—namely, the so-called private-label securities that own 10 percent of all mortgages but account for a third of all foreclosures. Hockett describes them as "suicide pacts" because they were devised without any way for their owners to modify the underlying loans. "After it became apparent that the feds weren't going to do this," Hockett says, "I thought, 'Well, let's try it some other way.'"
"I know what threats are. I know what bullying looks like. And I didn't like it coming from the folks that I helped bail out," Newsom says.
That other way became apparent last year when John Vlahoplus, a friend from Hockett's days as a Rhodes scholar, told him about MRP's business plan. Vlahoplus, MRP's chief strategy officer, wanted to make sure that it could withstand a challenge in the Supreme Court. (The Fifth Amendment enshrines the government's right to seize private property for public use, provided it pays just compensation.) Hockett believed it could.
"The broad category of property that we are taking about here is intangible property, and there has never been any question that intangible property can be taken," Hockett explains. He cites examples of eminent domain being used to seize railroad stock and municipal revenue bonds. Of course, cities must demonstrate that taking private property accomplishes a public good, and the benefits of seizing underwater mortgages are somewhat speculative. But so was the public benefit of seizing homes in New London, Connecticut, to make way for a Pfizer research facility—a use of eminent domain that the Supreme Court approved in its controversial 2005 Kelo v. New London ruling.
Lawyers for SIFMA, the securities industry trade group, point out that MRP seeks to cherry-pick performing loans from mortgage-backed securities. That means cities would seize loans whose borrowers are still current on their payments without compensating the bondholders for essentially wrecking the value of their remaining securities, which would be loaded with nonperforming loans that are unlikely to ever be paid off. "The difference between the compensation contemplated by MRP," they write, "and the compensation actually required by the Constitution and state law, is likely to be substantial."
Gluckstern calls this posturing. Studies suggest that 80 percent of underwater mortgages owned by private-label securities will end up defaulting. "We're taking the cherry bombs, not the cherries," he says, "because these are the ones that are going to explode." He argues that MRP isn't seeking windfall profits; it will charge a flat fee of $4,500 per loan it helps acquire, the same fee that the federal government pays loan servicers to modify existing mortgages. The real profiteers, he says, are the speculators who bought mortgage-backed securities on the cheap with the expectation of huge payouts. "The idea that a local community is going to challenge Wall Street's dominance of the financial system? That's why they are in an uproar."
In 1848, Horace Mann, the godfather of the modern public school system, wrote that education is "the great equalizer of the conditions of men—the balance wheel of the social machinery." But is that still true today? Reuters followed two high school students in Massasschusetts, home to the nation's top public school system, and found evidence that our schools are becoming the opposite of what Mann envisioned: another source of division between the wealthy and everyone else.
An artist's rendering of the Perot Museum's fracking-themed Shale Voyager exhibit.
If oil companies designed the lessons contained in middle school science textbooks, it would be a national scandal. But helping to design scientific displays in natural history museums that host countless school field trips each year? Apparently, that's just fine.
Take the shiny new Perot Museum of Nature and Science(yes, as in former presidential candidate H. Ross), which opened in Dallas on Saturday. A $10-million donation from Hunt Petroleum (now owned by Exxon) helped finance the museum's Hunt Energy Hall, where exhibits include a larger-than-life drillbit cutting through a slab of faux rock, and a fracking-themed virtual reality experience known as the Shale Voyager. The New York Times' Edward Rothstein got a preview:
The Hunt Hall has its virtues. Some science centers treat environmentalism with almost devout attention, eager to drive home homilies, so it is a novelty to see it treated in this hall, as it is in other parts of the Perot, as one subject among many. It is refreshing as well to see some attention devoted to the engineering difficulties in the extraction of oil and get some idea of the science, however awkwardly presented.
But it is almost bizarre to see a major exhibit about energy whose central focus is on fracking and its machinery, even if the process ultimately transforms American energy production. We also get little sense of the controversies and debates that now fuel any examination of the energy issue. Even if the hall is meant to reflect Texan preoccupations, we learn in only a small part of a display case that "Texas produces more wind energy than any other state in the U.S."
The Perot Museum is far from the only one pumping up fossil fuels. Forth Worth's Museum of Science and History features the XTO Energy Gallery, named after the eponymous Barnett Shale fracking outfit. And in North Dakota, fracking billionaire Harold Hamm has shelled out $1.8 million to help construct a new wing of the North Dakota Heritage Center that will include an exhibit on—you guessed it—fracking.
These relationships might seem less problematic if the museums actually built firewalls between their fundraising and curatorial departments. I don't know how things work at the museums in Dallas and Fort Worth, but when I visited the North Dakota Heritage Center earlier this year, museum staff told me that they'd sought Hamm's input on the content of their energy exhibits. This brings to mind the kind of "science" espoused by the Creation Museum—the transmutation of opinion and faith into "fact" through the magic of pseudo-scientific dioramas.
Hamm and Perot Musuem donors T. Boone Pickens and Trevor Rees-Jones represent a new generation of philanthropically inclined Texas oil magnates. But while their names are showing up on a lot of buildings, they haven't begun to build the kind of legacies left by, say, the Whitneys or the de Menils—families that underwrote world-famous art museums in New York and Houston. Funding fracking exhibits might be a good PR move, but in the long run, the best PR is the kind that lacks an obvious political agenda.
Earlier today, President Barack Obama took the battle over the fiscal cliff to Twitter, urging his followers to voice their support for his budget plan with the hashtag #MY2K. The tag refers to the $2,200 that the average American family will save each year if Congress votes to extend the Bush tax cuts for all but the top 2 percent of earners.
Obama's Twitter campaign reflects a push to mobilize his large army of grassroots supporters beyond the electoral campaign. His strategists don't want to repeat the mistakes of four years ago, when the populist energy from his campaign fizzled for lack of any meaningful way for his supporters to stay involved. Vocal support from liberals for the middle-class tax cuts might make it easier for Obama to boost taxes on the rich.
The #MY2K hashtag quickly began trending on Twitter. But waging a policy battle with social media isn't as simple as it might sound. Here's a sample of tweets that use Obama's hashtag:
The origninal tweet:
"Call your members of Congress. Write them an email. Tweet it using the hashtag #My2K." —President Obama
The money's there if you know where to look for it.
Josh HarkinsonNov. 28, 2012 7:03 AM
Although you might never know it from listening to the pundits, America isn't broke. We have plenty of money to pay for government programs—we've just gradually lost our ability to collect it. Here are 10 ways, most of them long favored by liberal economists, that politicians could avoid the fiscal cliff's $1.2 trillion in trigger cuts. While these ideas alone won't immediately eliminate the budget deficit, they will, combined with expected growth, point the nation towards a sustainable fiscal path.
Stop giving investors a sweetheart deal Additional revenue:$533 billion over 10 years
Low tax rates on capital gains are the main reason that billionaire investment guru Warren Buffett pays a smaller percentage of his income in taxes than his secretary does. In 2003, Congress capped the rate on capital gains (investment income) at 15 percent—far less than the 35 percent that people pay on their salaries. Tax hawks like to argue that raising the capital gains tax will stifle investment, but that argument isn't supported by the evidence. (Just ask Buffett.) Taxing capital gains as ordinary income—just like the IRS treats the investment gains from your 401(k)—would have the added benefit of undermining "carried interest." That, you may recall, is the ludicrous accounting trick that allows big fund managers (think Mitt Romney) to pass off their management fees as investment income, thereby avoiding the higher tax rates paid by their receptionists and janitors.
Quit subsidizing mansions and vacation homes Additional revenue:$214.6 billion over 10 years
The popular mortgage interest deduction subsidizes home ownership but it also distorts the real estate market and favors the wealthy. That's because people are allowed to deduct interest paid on mortgage debt up to $1.1 million—which in effect means that taxpayers are helping rich Americans pay for mansions and vacation properties. Eliminating the deduction entirely would likely yield the revenue gains listed above, but also make things tougher on middle-class homeowners. For a more palatable alternative, Congress could lower that $1.1 million cap to, say, half a million bucks and limit the deduction to loans on primary residences.
End the "step up" giveawayon inherited stocks Additional revenue:$764 billion over 10 years
Suppose your Aunt Mildred bought stock in Acme Widgets back in 1940 for $10 a share and has watched it appreciate to $100 a share. If she sells it now, she'll pay capital gains taxes on her $90-per-share profit. But if Mildred wills you the stock, you'll miraculously forego taxes on her gains. To put it in accounting terms, Mildred's $10-per-share "cost basis" will instantly "step up" to the stock price on the day you inherit it. So if she dies today, and you later sell your inherited Acme stock at $105, you only pay taxes on $5 per share. But eliminating this massive loophole would throw a wrench in the estate planning of lots of rich and powerful families, so don't get your hopes up.
Revitalize the "death tax" Additional revenue: $432 billion over 10 years
If you're old and rich and had the choice, this would be a pretty good year to die. That's because, unless Congress extends its Bush-era cuts to the federal estate tax (foes call it the "death tax"), the levy on inheritances will to revert to its old top rate of 55 percent and the exempt, nontaxable portion will go back to $1 million per individual beneficiary, down from about $5.1 million now. Even so, thanks to special breaks for family farms, businesses, and all but the largest holdings, the estate tax has never affected many households. In 2003, before cuts to the tax began taking effect, only 1.3 percent of deaths resulted in any federal estate-tax liability.