How big is Seattle’s housing crisis? And what are we going to do about it?
Those questions have been provoking debate over the past week in the wake of a report submitted to City Council by Cornell University law school professor Robert Hockett.
So far, the first question has generated the most attention. The report Hockett turned in last Wednesday painted a surprisingly bleak picture. “Seattle has about 42,000 underwater mortgaged homes,” Hpckett wrote. “That is over one third—about 33.3 percent of Seattle’s mortgage total, a remarkable statistic.” It’s even more troubling, Hockett noted, because underwater homes – homes whose mortgages are larger than what they would fetch on the market – are particularly susceptible to falling into foreclosure.
KUOW and other media outlets reported that the numbers seemed fishy, particularly the 42,000 figure, which was far higher than other estimates.
In an interview with Seattle Weekly this week, Hockett explained that he had used a number about half as big—24,000-- in a draft report submitted to council. But a working group providing input to the council urged him to go with the 42,000 figure, which was contained in a previous report commissioned by the Washington Community Action Network, an activist group, and the United Black Clergy. The higher number would convey more urgency, Hockett says he was told.
It’s a familiar tale. Individuals and organizations working on an issue frequently try to make the situation seem as bad as possible in order to dramatize the importance of their work and get as much funding as possible.
Yet even more conservative estimates, which Hockett put back into a revised report he’s finalizing this week, suggest that Seattle’s has a sizable problem on its hands. “There are thousands and thousands of people out there” with underwater homes, reiterates council member Nick Licata, chair of the committee dealing with housing.
The more interesting question is whether Seattle is prepared to take dramatic action. Hockett is certainly advocating as much.
According to the law professor, various city, state and federal programs aimed at stemming the tide of foreclosure have had only modest success. Programs may cut monthly payments or draw out loans, but they don’t reduce mortgage principal, so homeowners remain underwater.
Hockett outlines three strategies that would tackle that problem. Perhaps the most radical is the use of eminent domain, which allows governments to seize properties for the public good. The essential idea, batted about for some time among academics and officials, is that the government would take properties at risk of foreclosure and change the terms of the loan to reduce the amount owed by the homeowner.
One of the biggest weaknesses of an eminent domain strategy--aside from the backlash it would likely generate from financial institutions--is that it would take lots of money. The government has to pay a fair price for the properties it takes.
But Hockett advocates an interesting twist. The notes of many properties are owned by bondholders such as pension funds. Hocket contends they might be induced to supply the money needed for the transactions if it were explained to them that homeowners might as a consequence be less likely to default on their loans. The government would then give the notes, with amended loan terms, back to bondholders.
Hockett also recommends a complex house swapping arrangement, which would get around bankruptcy rules that don’t allow people to write off their primary residences, and the creation of a “land bank” that might have the government “foreclosing on the foreclosures.”
“I need to learn a lot more about all three” strategies, Licata says. He adds that his first step is simply to figure out whether writing down loans would stave off foreclosures.
At the same time, he signaled his willingness to try something radical. He says: “I come from an era where things that once seemed radical now seem normal.”