The City Council’s nascent discussion about how to help homeowners whose mortgages are underwater hit a bump last week. Some of the most shocking statistics in a report about the topic, presented to the Council last Wednesday, were wrong — based on old data and zip codes that fell outside the city limits. The number of homeowners who owe more on their mortgage than their house is worth is not 14.1 percent higher than the national average, as the report estimated, but rather 6.4 percent lower, according to June 2013 estimates from Zillow, a company that tracks real estate data.
The improved citywide numbers, while welcome news for many homeowners, obscure a more complex story about the local real estate recovery. Zillow estimates that 16,995 or about 17.4 percent of Seattle homes were underwater as of June, which is not bad considering the national average at that time was 23.8 percent. In three Seattle zip codes, however, according to the same estimates, over 30 percent of homeowners were struggling to pay-off underwater home loans. The uneven improvement in the local real estate market breaks not only along geographic boundaries but also along economic, ethnic and racial lines.
“If you look what’s happening in terms of the economic recovery, those well off, working in tech jobs are in a better financial position,” says Christopher Bitter, a professor at the Runstad Center for Real Estate Studies at the University of Washington. “The working class economy hasn’t been as kind.”
In Seattle, Bitter says, “If you look at real estate data, the east side prices are recovering much faster than the south side.” An interactive map on Zillow.com points to a similar trend. The map, which also uses June 2013 estimates, indicates that within Seattle, the zip code with the highest percentage of underwater mortgages is 98104. In this area — which includes parts of First Hill, Yesler Terrace, Downtown, Chinatown and the International District — 38 percent of mortgages are underwater. All three zip codes where the percentage of underwater mortgages exceeded 30 percent in Zillow's June estimates are south of Denny Way.
Across a wide range of categories, like income, education and race, the demographic contours between zip codes with the highest and lowest percentages of underwater mortgages are distinct, according to the 2010 Census and the 2007 to 2011 American Community Survey — the most recent data that the Census Bureau has published.
This data reveals that 28 percent of the roughly 13,095 people living within the 98104 zip code, where underwater mortgage rates are high, used food stamps in the 12-month period before they were surveyed. Thirty-two percent have a bachelor’s degree or advanced degree. Forty-eight percent are white, 24 percent Asian, 19 percent black and seven percent are Hispanic. Thirty-two percent of residents in the zip code are foreign born. Only 11 percent own homes.
By comparison, the 98105 zip code, which includes the University District and Laurelhurst, has one of the lowest underwater mortgage rates in the city, at about nine percent. Here, only 5 percent of the approximately 43,924 residents used food stamps in the 12-months before they were surveyed. Seventy-five percent have a bachelor’s or advanced degree. Seventy-one percent are white, 19 percent Asian, five percent Hispanic and two percent are black. Fifteen percent are foreign born and 35 percent own homes.
The 98106 zip code, which has the third highest rate of underwater mortgages, at 31 percent, resembles the 98104 zip code demographically. In the 98121 zip code, however, which includes Belltown and has the second highest underwater mortgage rate, at 34 percent, the similarities are echoed but less pronounced. For instance, the number of people who collected food stamps is relatively high at 10 percent, but so is the number of residents with college degrees, at 61 percent. The zip codes with the second and third lowest rates of underwater mortgages exhibit similar characteristics to the 98105 zip code, with low minority populations, high percentages of residents with college degrees and no more than 5 percent of residents having collected food stamps.
While he cautions that he hasn't done research to back it up, Bitter says he suspects homeowners on the south side of town are underwater because of low homebuyer demand and 'exotic mortgages' — a term that includes products like interest only loans, where payments are low at first and then huge balances become due. The low demand, Bitter says, could be partly due to tight mortgage lending standards that currently box many would-be homebuyers out of the housing market in working-class neighborhoods.
For embattled homeowners facing foreclosure, the calculus is simple. “If Social Security goes away, the house goes away,” explained 73-year-old Dixie Mitchell, whose home went underwater in 2008, at last weeks Council meeting. “If there’s anything you can do, stick your foot out there, stomp on someone’s head,” Mitchell said to the council, as the crowd — filled with about 70 homeowner advocacy group members — laughed and applauded. Mitchell has owned the same house in the Central District, near Garfield High School, for 46 years and lives with her husband, who is ill and in his eighties.
The city is examining options that might provide a lifeline to troubled homeowners like Mitchell, but adjusting the value of underwater mortgages is tricky due to thickets of legal and financial agreements between loan-servicers, banks and bondholders. There are few clear precedents for how a city can use its power to hasten widespread write-downs of homeowner debt.
While Councilmember Nick Licata, Chairman of the Committee on Housing, Human Services, Health and Culture, says he believes that some form of ‘principal reduction’ is the best path forward, he is quick to add that "This is not gonna happen on a fast track. It’s a complicated issue and it’s a political issue."
In spite of the funky numbers in the report, Licata said the Council will still consider the ideas its author, Cornell University Law Professor Robert Hockett, presented last week. Speaking at last Wednesday’s meeting via videophone, Hockett described three options that the city could use to prevent underwater homeowners from losing their homes. The first involves underwater neighbors temporarily swapping houses. The other two involve the city using eminent domain laws to purchase troubled mortgages and foreclosed property.
With the house-swap option, neighboring homeowners with underwater mortgages would lease their houses to one another and then file for Chapter 13 bankruptcy. Bankruptcy laws don’t allow for mortgage adjustments on a person’s ‘primary residence.’ But by swapping homes — and thereby establishing a new primary residence — the homeowners circumvent this rule. They could then negotiate new terms for their mortgage and when bankruptcy proceedings are over, move back into their original home.
While this plan works in theory, Hockett warned that judges might see it as a clever attempt to evade bankruptcy laws. In which case the homeowner will be back to where they started, albeit in bankruptcy and living in their neighbor’s house.
With the second option, which is also untried, the city would use eminent domain laws to seize underwater mortgages, not houses, and then sell them back to investors at a price that matches the market value of the mortgage-holder's property. Hockett believes investors would take the deal because the adjusted mortgages would carry less foreclosure risk and therefore be worth more in the long run. Investors, he said, might even give the city money to purchase the mortgages — effectively buying them from themselves, because the owners of most mortgage-backed debt are hemmed in by contracts that prevent them from writing-down its value. Richmond, CA enacted a similar plan last week and landed in a legal standoff with a consortium of big banks in a U.S. District Court.
The final option Hockett discussed, involves the city using eminent domain laws to take over foreclosed property and create a ‘land-bank.’ The city could then try to lease the houses in the land-bank back to their original owners at a fair market price, possibly using contracts that include rent-to-own agreements. According to the report, cities around the country, including Flint, Michigan and Utica, New York, have land-banks, but no municipalities have leased seized homes back to their original owners.
After last week’s meeting, in the hall outside the hearing chambers, Chettie McAfee, whose South Seattle home has been underwater since 2006, said she favored an eminent domain initiative that would lead to write-downs. Still, she’d be open to the idea of lease swaps — or any other idea for that matter. “If it’s gonna help people stay in their homes, I’m down for that,” she said.