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For a little over a year, entrepreneur Steven Gluckstern has been meeting with cities and towns to pitch his radical idea to deal with underwater homes, meaning homes that are valued far below what people owe on their mortgages.
Gluckstern says local governments should use their powers of eminent domain to seize the mortgage from bondholders, and then help homeowners get new mortgages at the current value of the home.
“We have some 10 million underwater families who don’t participate in our economy the way they should,” Gluckstern told Here & Now’s Robin Young. “This is something that needs to happen. The solution of throwing another four to eight million families out of their houses over the next four years seems to me… an absurd answer to how to solve this problem.”
If a homeowner has a $300,000 mortgage but the house is now worth $200,000, Gluckstern says the city could buy the mortgage for $160,000 from the bondholder, and then assist the homeowner with securing a mortgage worth $190,000 to pay back the loan and additional fees.
He’s arranged a pool of capital from investors to help cities finance the deals. The only problem is, so far no local governments have signed on to implement his plan.
Critics of Gluckstern’s plan say there would be a surge in mortgage rates, a tightened market for borrowers, and that the city would cherry pick the homeowners who are able to pay back the mortgages, leaving people most in danger of foreclosure in jeopardy.
Gluckstern argues that the people fighting for the status quo are the lenders who benefit from the homeowner paying the higher mortgage value, and those who benefit from the foreclosures that inevitably occur.
Most mortgages are traded as securities on the market for what they are worth now, Gluckstern argues, so the lenders that own the mortgages have already taken the loss.
“The financial institutions that brought us this disaster have been bailed out to the tune of hundreds and hundreds of billions of dollars, and the individual homeowners who were the target of what was predatory lending and… have not been bailed out in the slightest,” Gluckstern said. “I understand that a financial institution doesn’t want to be taking unnecessary losses… but that loss has already been taken; we just haven’t relieved the homeowner.”
Gluckstern recently suffered a set back with San Bernardino County voted down the idea. The county had been his most promising potential partner. But Gluckstern is undeterred. He says he has other towns lined up and expects to get the idea off the ground in the coming months.