The Great Saint Paul Land Grab, Part V

Over the past few weeks, we’ve been looking at  Saint Paul ordinance07-1194 4 (”Green Sheet” number 3046791), which the City Council adopted unanimously at its June 25 meeting. The law would require owners of vacant homes listed in Category II (needs a bunch of work) and Category III (almost tear-down material) to get a city-determined laundry-list of improvements, to get buildings of whatever age up to current building codes before they could get a Certificate of Occupancy.  These repairs would add between $20,000 and $100,000 and more to the cost of houses before they could be occupied. These buildings are largely owned by mortgage holders – banks, investment firms, debt traders, Fannie Mae and Freddie Mac. 

They are largely “upside down” – they were largely foreclosed with loan balances much higher than the houses’ current values.  In some cases, the discrepancy is immense. 

Dan Bostrom represents the Sixth Ward – the upper-half of Saint Paul’s East Side.  We spoke on the phone last week. 

“It’s not unusual to see houses with $200,000 balances that aren’t worth $30,000”, said Bostrom. 

And the problem – at least in Saint Paul’s worst-affected neighborhoods, Frogtown and the North End and the lower East Side – is serious.  “There’s one block”, Bostrom notes, citing a block just off Payne Avenue, on the lower East Side, “with 23 houses on it.  12 are vacant”. 

The ordinance is intended to compel banks and other lenders owning foreclosed property in Saint Paul to bring foreclosed property up to current building codes before they can be re-sold.  “The outcome we’re looking for”, said Kathy Lantry, who represents Ward Seven, which includes the hard-hit Payne-Phalen and Dayton’s Bluff neighborhoods as well as the placid proto-suburban expanse of Battle Creek, “is a city with liveable houses, that people can afford to live in”. 

Which is, of course, what everyone wants; it’s the means to the end that are the question.  I wondered if this strategy – putting intensely difficult conditions on selling foreclosed and vacant properties – had been thought through; how likely were institutional mortgage-holders to comply with this ordinance?  Had there been any “market research” done on the percentage of compliance expected?

“No”, said Lantry.  “We did this just for the fun of it”, she quipped sarcastically.  She quickly added that the ordinance was not a hasty decision; “We went over this ordinance with any number of bankers, the St. Paul Association of Realtors”, and other local financing bodies to sanity-check the proposal.

“…there was a fair amount of give and take with local community banks in helping to improve upon earlier drafts of the ordinance, and a local representative of an association of community banks in the area has said that they are relatively comfortable with the final ordinance”, added Ward 4’s Russ Stark in an emailed response.

OK – so there was some buy-in (and I plan on following up with some of the industry sources named in the interviews) from the local financial-services community.  We’ll come back to that (I plan on interviewing some of the industry sources named in my interviews, later this or early next weeks). 

But what if, at the end of the day, the lender doesn’t comply?  If the price to get the house – especially a detriorating, vacant one – saleable in the near future is just too high?  Will they have to sell at a huge loss?

“The goal”, added Lantry, “is to get these companies to negotiate workouts with homeowners, rather than foreclosing”. 

“We have provided a cattle prod to try to get them to negotiate”. 

OK, good – but what if they don’t?  What if the prospect of a huge loss is just not acceptable, for whatever reason?  More to the point – what about the houses in which there’s nobody to negotiate, the city’s huge stockpile of vacant homes (which topped a total of 2003 buildings earlier this week – 80% of which would be affected by the terms of this ordinance)?  

“Unfortunately, many of the properties in question, prior to the ordinance, were already ‘falling through the cracks” and deteriorating to the point of needing to demolished”, said Ward 4’s Stark, referring (I presume) to the 300-odd Category III properties on the vacancy list.

“If the mortgage holders walk away, the house is probably beyond saving”, said Lantry.  “Look – you need to remember that these lenders are not unsophisticated, mom-and-pop lenders.  These are big companies…they have a fiduciary responsibility to their trustees…their responsibility is to maintain [these assets] for their trustees”. 

But what if the lenders did abandon these properties?  And remember, there’s a time limit for properties on the vacancy list.  Hypothetically, let’s assume the worst: that most of the banks involved decline to comply with the ordinance.  They also stop paying property taxes, allowing the properties to go tax-forfeit.  The land forfeits to the State, obviously – but the State then assigns it to the city/county to dispose of.  Assuming the hypothetical “worst case” scenario, what does the city intend to do with all of this new property?

Bostrom denied any interest in this; “We don’t want to own a bunch of houses”.  But how about the land the houses are on?  Bostrom vigorously denied any city plant to gobble up property. 

Russ Stark:  “We’re trying to use this and several other tools at our disposal to avoid the problems that all of us are concerned about — and yes, there is some risk that these tools will not be effective.”

“Remember”, added Lantry, “you have two years to sell a house that’s Category II…if they can build a bridge across the Mississippi in 24 months, they can sell a house in two years.”

Of course, bridges that carry 140,000 cars a day are a bull market.  Houses, these days?  Not so much.

More Friday.

UPDATE:  Of course, it’s Russ Stark.  Matt was an ACLU lawyer.  In 1986.  Blah.

(Read the whole series: Part I, Part II, Part III, Part IV, Part V)

15 thoughts on “The Great Saint Paul Land Grab, Part V

  1. They have a point.

    There are far more houses in St. Paul at risk of foreclosure than have actually been foreclosed. Theoretically, increasing the cost of foreclosing – by making it next to impossible for the mortgage-holder to recover anything from a foreclosed property – would reduce the number of foreclosures.

    Of course, there are already plenty of reasons why the banks wouldn’t want more foreclosed properties than they already have on their books. I’m not sure we need more, and I’m not sure that this will make much of a difference.

  2. “if they can build a bridge across the Mississippi in 24 months, they can sell a house in two years”

    He left out something: “…they can rebuild and sell a house…”

    In that analogy, what is the equivalent of the huge amount of money from taxes that went towards getting the bridge built that quickly? Banks /= governments.

  3. If the objective was to force lenders to deal with homeowners by threatening the lenders with unsaleable foreclosed homes, why not go all the way and just ban foreclosures?

    Is there some legality the says a city can’t ban foreclosures but it can make the sale of foreclosed property so expensive it’s a virtual ban?

    What’s the diff and why the half-measure?


  4. It’s the state that writes the statutes that cover contract law, mortgages, foreclosures, etc. The cities don’t have the authority to change it.

  5. This looks pretty straightforward. Abandoned house on lot in less-than-great neighborhood (like, say, a block with 23 houses on them, more than half of which are unoccupied), requires $150,000 dollars in repairs in order to be sold, at which point it will be worth — assuming that the market doesn’t decline — $155,000. Writing it off, and letting it revert to the city costs zero, and has some bookkeeping/tax advantages (huge, compared to risking $150K to maybe make $5K). The city gets the empty house, the land, and the costs of demolishing the house (I mean, even the St. Paul City Council isn’t going to be dumb enough to spend that kind of money for such little possible profit) . . . or offers it to a developer, who gets the land, gratis, provided he demolishes the house.

    Gee, I wonder what’s going to happen.

  6. Nate,

    What JDege said. The city’s powers are enumerated (to some extent) and limited. The city doesn’t control state contract law – but they do control the criteria by which COOs are issued.

    Hence, the COO is their leverage – the instrument they control that can completely negate any value in that asset.

  7. Hence, the COO is their leverage – the instrument they control that can completely negate any value in that asset.

    Now, assuming a smidgen of rationality in the banks (rare, but it can happen), how easy is it for any homeowner in St. Paul to get a mortgage if the city makes it virtually impossible to foreclose on any home similar to these? How easy will it be to get a mortgage in a city that would rewrite its laws this way? And how much will this raise the cost of mortgages in St. Paul?

  8. “How easy is it for any homeowner in St. Paul to get a mortgage if the city makes it virtually impossible to foreclose on any home similar to these?”

    Next to impossible, until the next red-lining scandal hits.

  9. Yah know, one of the best overarching, use in any situation, apply liberally questions I’ve ever heard was “Are you prepared to be wrong?”
    Politicians never, ever consider that question when messing about with anything they can. In this case they don’t take it in the shorts for the approximately $300,000,000 in real estate assets that they’re playing with here.
    Mess with the market, the market always responds. Just not in the way these baboons would hope.

  10. pity the poor homeowner who try’s to sell his home and finds out he may have to wait a couple years for a cash(non-mortgage) buyer to show up.

    In 5 years the Tics will have St Paul looking like their other shining city on the hill: Detroit! Then we can watch the spectacle of them wringing their hands about the out of control arson rate.

  11. If the city makes it hard to get a mortgage it only makes the mortgage more expensive, it also further decreases the value of existing homes.

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  13. Pingback: Shot in the Dark » Blog Archive » The Great Saint Paul Land Grab, Part II

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