Holly Chisa

By Holly Chisa, UTA Washington Lobbyist, HPC Advocacy

The City of Seattle is considered to be a trendsetter in several ways. In 2012, the City required employers to provide sick leave. In 2014, the City passed the highest minimum wage rate in the country, raising the wage to $15 an hour over the next several years. Housing advocates have encouraged Seattle Council Members, too, to adopt policies already discussed in just a few other cities across the country – using eminent domain for underwater mortgages.

Similar to what has been proposed in cities in California, the Seattle City Council considered the idea of allowing the City to seize underwater mortgages and lower the balance. Interestingly, the proposal came at a time when Seattle’s housing market was beginning to improve, with NOTS down 37% from 2010, and less than 2% of Seattle homes in foreclosure.

Industry learned of Seattle’s interest in eminent domain in the fall of 2013. Advocates raised the issue with members of the Council who have strong leanings towards helping homeowners in broad, sweeping methods and also have issue with larger corporations and financial institutions. Eminent domain, to them, seemed a pro-active solution to help underwater homeowners who had been maligned by large, out-of-state banks.

Over the last six months, representatives from the various aspects of the financial industry, including financial institutions and law firms, talked with Council Members about the adverse affect using eminent domain in this way could have on the financial stability of the City. Even some housing advocates expressed their appreciation for Council Members wanting to help homeowners, but that this particular policy might not be the best method.

As trustees are familiar, using eminent domain in such a broad method could put the City finances at risk. The Federal Housing Finance Agency has said they would restrict Fannie Mae and Freddie Mac loans in areas with eminent domain – this would be a significant hit to the largest city in Washington State. While there is an identified group that would rather allow the legal issues of using eminent domain on underwater mortgages to be sorted out by the courts, many attorneys on both sides of the issue do recognize the significant legal issues of using eminent domain beyond its current, accepted use to build right-of-ways and develop parks.

During a presentation from City of Seattle Interdepartmental Report (IDT) on Foreclosure Prevention/Principle Reduction on March 26, 2014, City staff acknowledged that eminent domain carried far more risks than first presented. They stated in their presentation that, “[t]his strategy has widespread legal and financial implications – far beyond the refinancing of a loan.” They also referenced the statement from the Federal Housing Finance Committee, “…citing ‘a clear threat to the safe and sound operations of Fannie Mae, Freddie Mac and the Federal Home Loan Banks.’ ”

In their final draft report, dated June 19, 2014, City of Seattle staff recommended the implementation of the Seattle Homeowner Stabilization Program. This includes education to homeowners of the various programs available to them, including the FFA, legal services available, housing counselors, and other services that may be needed secondarily (like medical or counseling support services.) They will target homeowners identified as being “at risk,” and use $150,000 in funds for outreach to direct homeowners to these available programs. A report on the success of this outreach is due back to Council by the end of December, 2014.

Additionally, staff recommended that Seattle look at the work being done in Oregon and Boston with their loan refinancing programs. Specifically they called out the Boston SUN program, and the Oregon Loan Refinancing Program. Staff recommended examining the feasibility of modifying refinance program limits for loans higher than $100,000 to reach more homeowners in Seattle. There was discussion of potential changes to state law to support that effort. These programs are seen as both less risky for the City than eminent domain, and other successful state models could be used to develop a principle reduction/buy back program in Seattle.

In their March 26 presentation, staff’s final conclusion was that the City Council not pursue eminent domain as a solution for underwater mortgages because “[t]he significant legal and financial implications of this untested strategy outweigh its potential benefits.” To date, the Seattle City Council has not pursued eminent domain further. Some housing advocates do still support this method of mortgage reduction, and continue to push for direct Council intervention in the perceived “fight” between underwater homeowners and the banks foreclosing on them.

Any further steps by the Council likely won’t take place until after the next report is delivered at the end of the year. Until then, the Seattle housing market continues to improve, with an 8.6 percent increase in housing prices from last year, and the median price of homes up a total of 8% from 2008. Hopefully, as the economy and housing markets improve, the desire to turn the City of Seattle into a property/mortgage manager may fade and change the focus to more pragmatic solutions.