Ending Foreclosures

With Local Solutions

By Michael Sauvante National Commonwealth Group, Inc.
Wall Street abuses! Inaction in Washington! Regardless of where one points the finger, the foreclosure crisis continues to devastate the American economy. Community banks are particularly hard hit, through no fault of their own, and many have failed, seized by regulators or snatched up by larger banks seemingly immune to regulatory heavy handedness. Collapsing real estate markets have a domino effect on institutions that are dependent on healthy real estate values, in particular local governments that rely on property taxes. The problem is that the players who might have a solution to the crisis are pressured in ways that exacerbate it. For example, community banks would be penalized by the FDIC and other regulators if they tried to help homeowners by renegotiating their loan payment amounts, providing them payment holidays or simply writing down the value of the loans. The federal government would have to initiate a massive new program to cover the costs to the banks that would produce, or require regulators to radically alter their rules to allow banks to take such actions without a negative impact on their own status. Neither is politically feasible. And Wall Street banks have no motivation to step in and solve the crisis that they helped to create. But there is a way out. Local governments, primarily at the county level, can exercise certain of their legal rights, including the right of eminent domain.1 And they can go much further if they also make creative use of existing banking laws.

COUNTIES & FORECLOSURE

Most of the legal procedures associated with foreclosures occur at the county level, including legal fil-

ings, court hearings and the too familiar process of sheriffs evicting homeowners after foreclosure. This allows counties to begin implementing a solution in three simple steps:

Step 1:

Counties can declare a moratorium on foreclosures on the grounds that they are economi-

cally harmful to all residents of the county, not just individual homeowners and mortgage holders). The decline in overall property values following foreclosures impacts the revenue of the county and other government entities that depend on property tax revenues. Reducing or stopping foreclosures is clearly in the public interest and is the first step in solving the problem locally.

Step 2:

The county can order its sheriffs not to evict any property owner as a result of already in-

stituted foreclosure proceedings or other parties that have moved into foreclosed homes as part of the Occupy Our Homes2 movement and other similar activities. That would prevent homeowners being thrown out on the street and provide homes for those already evicted.

COMMONWEALTH GROUP

Through the exercise of eminent domain and creative use of existing banking laws, local governments can solve the foreclosure problem.
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Step 3:

The county can begin working with

such a legal battle requires financial resources that are usually missing because the homeowner is already in financial difficulties, causing the foreclosure proceedings in the first place.

homeowners who are under threat of foreclosure to distinguish which homeowners have mortgages primarily with local institutions versus those that have been re-sold and currently held by MERS (Mortgage Electronic Registration Systems, Inc.) or other nonlocal institutions. MERS is a private mortgage registry that Fannie Mae and Freddie Mac formed along with major banks to bypass public registration of deeds and facilitate the creation of mortgage-backed securities. MERS holds about half of the mortgages in the country.3

COUNTIES, MERS & EMINENT DOMAIN

How can a county use that credit generating abil-

ity This is where counties can come to the rescue. If the financial institution (typically downstream from the originating bank and rarely a community bank) cannot demonstrate clear title, the county can invoke its power of eminent domain to resolve the issue. Eminent domain allows a government entity to seize not just physical property but intangible property such as contract rights, patents, trade secrets and copyrights, provided that doing so is in the public interest and the owner is compensated at fair market value. Counties simply need to provide adequate public notice that the property is subject to eminent domain seizure. If the lender cannot provide proof of title by the end of the notice period, the county can proceed with the seizure uncontested. Since there is no identifiable party to compensate, this procedure costs the county next to nothing. Regardless of the cloud over the title prior to the seizure, clear title is once again established afterward. We have a long history of counties re-establishing clear title, as in cases where property is seized (e.g., for failure to pay taxes) and sold in what are often called sheriffs sales. The title industry considers such sales to wipe out all previous title history, and any future title searches only go back to that date. As the title cost the county essentially nothing, it can negotiate terms with the homeowner that will redefine what portion of the property the homeowner is allowed to retain and also allow the homeowner to remain in the home. That could include a temporary moratorium on any payments pending improvement on the homeowners financial condition. At a very minimum the county can then rent the home to the (former) homeowner.6 The net result of this process is:

THE PROBLEM WITH MERS

MERS was created to simplify the bundling of

large numbers of individual mortgages into other financial instruments, which resulted in the breakdown of the normal process of title transfer. One reason for that was a desire by the owners of MERS to avoid title transfer costs and thus increase their profits on securitizing those mortgages. The result is that many homeowners are paying on mortgages for which no clearly defined mortgage holder can be identified. The majority of state attorneys general are in battles with Fannie and Freddie over their unresponsiveness to homeowners need to reduce their debt4 and the imposition of foreclosures even when proper title cannot be presented. Yet in order to perfect a fore5

closure claim, a mortgage holder is supposed to have clear title to the property, giving them the right to seize the property for non-performance on the part of the mortgagor (homeowner). Where clear title cannot be evidenced, the law should be on the side of the homeowner. But courts, banks and law enforcement have often run roughshod over homeowners who, without the financial resources to fight foreclosure proceedings, are often powerless to stop the juggernaut. If the purported mortgage holder cannot prove clear title, then the law is clear that the homeowner should be able to retain possession and control of their property. Yet many homeowners have been foreclosed improperly and forced out of their homes. Some homeowners have successfully prevailed in court by demanding that the foreclosing entity prove title, which in many cases they could not. Of course,
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1. 2.

Foreclosures and their negative ripple effect More homeowners remain in their homes,

on the local economy are reduced. helping to preserve neighborhoods.

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3.

The county receives new revenues.

indirectly by the public sector (the federal government, states, counties, cities and other administrative districts). Examples can be found around the world, but with the exception of the Bank of North Dakota (BND,8 a DBA9 of the state of North Dakota) and a few non-profit-owned banks, banks in the United States are owned by private investors. Nonetheless, BND can serve as a model for what is possible in other jurisdictions. North Dakota has the healthiest economy of any state, with a low 3.5% unemployment, no credit crisis and the lowest default rate on loans. It is also one of only two solvent states in the country. And even though oil is often cited as its secret to success, it is not. Profits from BND are the largest revenue source for North Dakota with oil-related revenues coming in second.10 In contrast to what many might assume, BND does not compete with private banks but instead serves as their mini-Fed, partnering with community banks in a manner that proves to be very profitable for them. The state actually has more local banks per capita than any other and has had no bank failures in more than a dozen years! The BND success story is catching on. Several states are exploring variations on the North Dakota model. For example, the California legislature recently passed a bill11 to study the feasibility of establishing a state-owned bank. Even cities are looking to get into the act: A recent mayoral candidate in San Francisco advocated a city-owned bank.12 We can see similar BND stories in other countries. In May 2010, The Economist13 noted that the strong and stable publicly owned banks of India, China and Brazil helped those countries weather the banking crisis. And Germany, with one of the healthiest economies in Europe, has a large number of public banks,14,15 accounting for about 40% of the countrys banking assets. Those public banks are for the most part found at the local level and their primary focus is on supporting small business and local economies. Germany has one of the strongest small business communities in the world. So how can this public banking concept be used to help solve the foreclosure crisis?

THE MORAL ARGUMENT

In addition to the economic benefits of stopping

foreclosures, this process addresses the fact that the MERS system was designed to skirt legal procedures in pursuit of profit. The foreclosure crisis stands at the very center of our economic woes, and since the federal government appears incapable or unwilling to address this problem, this solution lies with local communities. The nature of free market capitalism is that you risk losing your investment. If, like the owners of MERS, you do so because you played fast and loose with the rules, then taxpayers especially should not be required to bail you out, as MERS owners might demand if their system starts to significantly unravel.

LEGITIMATE MORTGAGES
What can the county do when the titleholder is a

financial institution, like a community bank, that normally does not re-sell its mortgages? The county can still exercise eminent domain and seize the property, paying fair market price. Actually, were the bank to be paid the current appraised value for the property, it would in most cases come out financially ahead of what it could realize from a foreclosure sale. How does the county finance the eminent domain purchase of a property at fair market value? Currently, that means borrowing the funds from other institutions and repaying them out of tax revenues and/or the revenues realized from payments by the homeowners. One could argue that the revenue from all of the properties seized (both the MERS properties and those bought for full market value) should be adequate to service the debt. But the county has another tool that allows it to go far beyond financing seized properties and into facilitating the larger credit needs of the county and its residents.

PUBLIC VS. PRIVATE BANKS

The solution begins with banking and, in particu-

lar, public banking.7 Rather than being owned by private investors, public banks are owned directly or

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CITY & COUNTY-OWNED BANKS

Counties and medium-to-large sized cities can

by $10 million dollars is able to create approximately $100 million in loan money for borrowers! So if our example bank is established as a DBA of the county, the entire balance sheet of the county is essentially the starting balance sheet of the county bank. If the county owns just a $100 million in net assets (a small county by most standards) that county bank would have the credit generating capability of up to $1 billion, that is, it can create $1 billion out of thin air, just like any other bank, that it can make available to its own citizens simply because it and they own those assets! And they dont have to turn to Wall Street, Washington or anyone else to make that money available to their community.

take direct control of their local foreclosure problem and resolve it using banking laws along with eminent domain. Lets use a county as an example. The county applies to its states banking regulatory body for a state bank charter16 (all states define the requirements for charters and oversee compliance.) Once a charter is granted, a bank can commence normal banking activities that conform to internationally accepted processes and procedures. However, all banks are not alike in who they serve and using the BND model, we would advocate that they not offer retail banking services to the general public (personal checking and savings accounts, car loans etc.), but rather serve the community in a wholesale banking role like BND. How will that help solve the foreclosure problem? By taking advantage of how banks work and their unique role in injecting money into the economy. One fundamental banking activity is the ability to create credit (money). As explained on the website of the Bank of Dallas, one of the twelve regional Federal Reserve banks, under the section entitled How Banks Create Money Banks actually create money when they lend it. Heres how that works: When a bank creates credit for a borrower, it does not reach into a pool of existing funds but rather creates that credit simply with an accounting entry.17 (For example, if my bank grants me a $20,000 car loan, it does so by entering a liability on the banks balance sheet to give me $20,000, offset by an entry on the asset side of its balance sheet represented by the loan document I signed. It doesnt have to get that money from depositors or anyone else, but creates it out of thin air!) The only constraint on how much credit money banks can create is based on a long-standing convention that limits the amount to a multiple of the banks assets. That varies by jurisdiction (i.e., conditions set by local regulators) and the prevailing economic climate, but averages around 10 times, i.e., for every $1 in assets owned by the bank, it is allowed to create $10 in loans. Thus, a new bank capitalized

PUBLIC BANKS & FORECLOSURES

How can a county use that credit-creating abil-

ity to solve its foreclosure problem? It takes just two steps:

1.

The county issues a moratorium on all fore-

closures, requiring instead that all mortgage holders deal with the county bank instead of instituting foreclosure procedures against property owners.

2.

It buys distressed real estate loans from the

existing lenders, just as the Federal Reserve did by buying toxic assets from the Wall Street banks. The county bank acquires those loans by creating a credit account for the current mortgage holder in the amount of the fair market purchase price for each loan/property. This now puts the distressed mortgage in the hands of the county. This benefits everyone: the county, the homeowner and the mortgage holder especially if it is a local bank.

GOOD FOR THE COUNTY

For the county, this solution has multiple posi-

tives. From a broader perspective, a moratorium on all foreclosures will go a long way toward stopping the collapse in property values and hence tax revenues. Most taxed-based government entities have been devastated by the drop in property values, and this solution would not only prevent further revenue declines but actually increase revenues.

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By taking the steps outlined, a county can now own additional revenue generating assets, without having to fork over any up-front cash to acquire them. The current mortgagor (home owner) may not be able to pay the full amount of their current mortgage obligation, but many are in a position to pay a portion of that obligation. Commercial banks are not in a position to accept lowered payments, but a county bank would be in a totally different position. Any revenue that the county bank collects is essentially new money that would not otherwise be going into county coffers. Thus the county is incentivized to negotiate with property owners to pay any amount they can afford. The county is also disincentivized to foreclose, given the revenues it would forego, plus the drop in overall property values a foreclosure precipitates.

up front. The selling bank just reports the proceeds from the sale of the mortgage as a deposit with another bank. That makes the selling banks balance sheet even stronger (deposits in other banks like the Fed are viewed by the regulators as equivalent to cash assets). The result is that a previously unhealthy community bank can return to fiscal health and be in a much better position to turn on its lending spigot to address other local credit needs.

HOW CONGRESS CAN HELP

Because it builds on long-established rules, this

public banking solution does not require any new laws. However, there are two areas where existing federal rules could potentially interfere:

1.

The Federal Deposit Insurance Corporation

(FDIC).18 Born out of the mass bank failures of the

GOOD FOR THE HOMEOWNER

Property owners facing foreclosures would get

1930s when many depositors lost all their money, FDIC was formed to protect the public by insuring depositors funds up to a certain limit. That limit was recently raised to $250,000 and is intended primarily to protect individual, retail depositors. Larger depositors, wealthy individuals, businesses, government entities and others are left to protect themselves, as the government is primarily concerned with protecting the little guy. As part of its role in guaranteeing such deposits, FDIC also serves as a primary regulator over its participating banks, and is empowered to seize such banks if they fail to follow FDIC guidelines, including the quality of their loan portfolio and their basic financial condition. And although participation in the FDIC insurance program was originally voluntary for banks, current federal law requires that all new banks join the FDIC program and be subject to its provisions. The problem with that regulation with respect to publicly owned banks is that public banks should not be in the retail banking business and taking deposits from the general public. Therefore the primary party that FDIC is designed to protect is not even part of the equation. Furthermore, although it makes sense for the FDIC to have the authority to seize a private bank
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a reprieve. A county-mandated foreclosure moratorium would immediately relieve many mortgagors from the fear of losing their homes or declaring bankruptcy. They could negotiate terms with the county bank that would allow them to remain in their homes while they work through their financial difficulties.

GOOD FOR THE LOCAL BANK

The terms of the purchase would require the sell-

ing bank to leave the mortgage purchase proceeds on the books of the county bank (similar to a reserve deposit with the Fed) until the county bank releases those funds (which it may do only when the property is sold or based on some other conditions stipulated by the county bank). For the selling bank, this has two major benefits, both of which improve its health significantly. First, by selling the loan to the county bank for the fair market value of the property, the bank gets rid of a bad loan without having to show the loss on its books that it would forced to take on the sale of a property post foreclosure, a plus for regulators like the FDIC when evaluating and rating a banks loan portfolio. Second, no money has actually changed hands

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and all its assets, seizing a publicly owned bank, especially if it is structured as a DBA of the governmental body (in our example the county itself), would mean that FDIC could seize all the countys assets. That clearly is inappropriate. Any tax-based government entity is always capable of taxing its way out of its financial problems and bankruptcy (for example) is an extremely rare event for any government entity in the United States. The simple solution is to have Congress exempt all publicly owned banks from participation in the FDIC insurance program.

banks and other corporate interests) would have regulatory oversight over a government. The inevitable battles that could produce would be avoided by Congress establishing an exemption from the Bank Holding Company Act for public banks. That, coupled with the FDIC exemption, would clear the way for states, counties and cities to set up their own banks and help their communities in ways not possible under current conditions.

OTHER BENEFITS OF A COUNTY BANK

The Bank of North Dakota provides examples of

2.

The Bank Holding Company Act.19 A bank

ways in which a public bank can support the credit needs of its community in a manner that nurtures and supports the existing local banking community and its constituents. Those could include loan guarantees to banks for targeted lending to small businesses or for such things as renewable energy projects. We recommend that any government body that intends to establish its own bank consider establishing an advisory group that represents all the major interests in the community (businesses, non-profits, other government entities, the general public, etc.) that would evaluate what the county bank should do to help the community realize economic and other goals. Such a group could also establish guidelines that ensure both safe banking practices and prevent inappropriate allocation of bank resources to private parties through cronyism or political influence. A county bank would be leveraging the sum total of the assets owned by the county and thus the public, who have paid for those assets through many years of investment via their tax dollars. Public banking allows citizens and their government to monetize those assets without having to sell them off, especially for pennies on the dollar in fire sales as some jurisdictions have done. That is because of the unique characteristics of banking laws that allow a bank (and thus the county) to create credit money by virtue of just owning assets, without having to liquidate those assets in the process.

holding company is a company (other than individuals) that controls (owns) one or more banks, but does not necessarily engage in banking itself.20 For example, if Corporation A owns Corporation B and Corporation B is a bank, then Corporation A would be considered a bank holding company and be subject to the Bank Holding Company Act. If our hypothetical county formed a separate corporation to be the entity that is its county bank (rather than as a DBA of the county), then by definition the county would be a bank holding company. That would have its own consequences similar to the FDIC problem.21 Heres why. One of the key provisions of the Bank Holding Company Act granted regulatory jurisdiction over bank holding companies to the Federal Reserve.22 This not only means that the county would be subject to inappropriate regulatory oversight (it would not engage in the kinds of activities or structures that the act was intended to oversee), the regulator is not even a government entity, but an aggregation of several private corporations. The Federal Reserve is composed of one central bank (often called The Fed) that is owned and controlled by twelve regional federal reserve banks that are in fact private corporations. As noted by the Ninth Circuit Court of Appeals, The Reserve Banks are not federal instrumentalities for purposes of the FTCA [the Federal Tort Claims Act], but are independent, privately owned and locally controlled corporations. 23 That would mean that a group of private corporations (themselves controlled primarily by the big
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START NOW!
What could your community do if it had the

ability to create all the credit it could possibly use to rebuild its economy and get back on the road to
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650 641 1246

economic health? You dont have to wait for Washington or Wall Street to come to the rescue. You can start now! The National Commonwealth Group, Inc., a 501(c)(3) non-profit corporation, will be facilitating networking between groups interested in setting up their own public banks, and can help provide guidance to parties interested in exploring this solution. At the very least county administrators should be petitioned to place a moratorium on local foreclosures and exercise the eminent domain seizure of those foreclosure candidate properties for which no clear titleholder can be established. That will require no new systems at the county level and will go a long ways to ending the devastation of foreclosure.

A Municipal Bank In San Francisco? City Explores Revolutionary New Model http://www.huffingtonpost.com/2011/11/03/municipal-bank-sanfrancisco_n_1074600.html
12.

http://www.economist.com/node/16078466?story_ id=16078466
13. 14. 15.

http://en.wikipedia.org/wiki/German_public_bank

The Public Option in Banking: Another Look at the German Model http://www.webofdebt.com/articles/ public_options.php
16. 17.

http://en.wikipedia.org/wiki/State_bank

Dollar Deception: How Banks Secretly Create Money http://www.webofdebt.com/articles/dollardeception.php

18. 19.

http://en.wikipedia.org/wiki/FDIC

http://en.wikipedia.org/wiki/Bank_Holding_Company_Act_of_1956

HOW TO REACH US
8 www.nationalcommonwealthgroup.org

http://en.wikipedia.org/wiki/Bank_Holding_Company
20.

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http://www.commonwealthgroup.net/docs/StateBanksDBAvs.Corp.pdf
21. 22. 23.

http://en.wikipedia.org/wiki/Federal_Reserve_Bank

REFERENCES
1. 2. 3. 4.

United States Court of Appeals for the Ninth Circuit, in Lewis v. United States, 680 F.2d 1239 (9th Cir. 1982) http://bulk.resource.org/courts.gov/c/F2/680/680. F2d.1239.80-5905.html

http://en.wikipedia.org/wiki/Eminent_domain http://occupyourhomes.org/ http://en.wikipedia.org/wiki/MERS

Kamala Harris, California Attorney General, To Fannie And Freddie Head: Step Aside Over Mortgage Crisis http://www.huffingtonpost.com/2011/11/04/ kamala-harris-mortgage-crisis-california-fanniefreddie_n_1077218.html Beau Biden, Delaware Attorney General, Sues Big Banks Mortgage Registry http://www.huffingtonpost. com/2011/10/27/beau-biden-mortgage-registry-lawsuit-banks_n_1062635.html
5.

Right-to-Rent: A Simple, Sensible Idea That Dysfunctional Washington Is More Than Happy to Let Die http://www.huffingtonpost.com/arianna-huffington/ righttorent-a-simple-sens_b_1082919.html
6. 7. 8. 9. 10.

http://www.publicbankinginstitute.org http://en.wikipedia.org/wiki/Bank_of_North_Dakota http://en.wikipedia.org/wiki/Doing_business_as

North Dakotas Economic Miracle - Its Not Oil http://www.yesmagazine.org/new-economy/thenorth-dakota-miracle-not-all-about-oil http://www.webofdebt.com/articles/california_leg. php
11.

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Stopping Foreclosures
A Local Action Plan
By Michael Sauvante National Commonwealth Group, Inc.
In order to take action to address the foreclosure crisis in this country, one has to first understand several key elements of the problem. Those elements are summarized below, followed by an action plan for mitigation and, ultimately, solution at the county level.

BACKGROUND
Foreclosures remain at the heart of the economic crisis that has plagued the United States since the

collapse of the financial markets in 2008. Experts agree that the country will not be able to solve the crisis without addressing the foreclosure epidemic. And as bad as it is, we are not even halfway through. Thus the country faces a prolonged financial crisis if foreclosures are allowed to continue unabated. Recognizing that foreclosures are harmful to both local economies and the national economy, Federal Reserve Chairman Ben Bernanke recently sent a Federal Reserve paper to the leaders of the House of Representatives Committee on Financial Services arguing that relying heavily on foreclosures to deal with mortgage borrowers who cant meet their obligations is costly and inefficient for the housing market because they can lead to deteriorating homes and weigh down property values in the surrounding community.1 Making matters worse is the substantial evidence that this foreclosure epidemic is being driven by a large and systemic amount of fraud and illegality2 perpetrated by banks and other mortgage institutions like MERS .3 Thus not only do we have a financial crisis, but a massive legal crisis. In response to this problem, multiple state attorneys general have launched investigations and lawsuits against MERS, banks and other lending institutions. In the middle of this legal and financial conflagration, no government entity is closer to ground zero than county governments. Although foreclosures impact just about every branch of government from the federal level down to the smallest townships, counties are receiving the brunt of the impact, as the majority of the legal elements associated with foreclosures occur at the county level. County sheriffs, for example, are tasked with managing evictions and other similar legal actions. County courts are where most foreclosure proceedings are managed and county recorders are tasked with tracking and recording all title issues related to real estate in the county. The problem is that in fulfilling these legal duties, most counties have become unwitting facilitators in a massive criminal enterprise. One county recorder, John OBrien of Southern Essex County in Massachusetts, contracted for a forensic study on foreclosures in his county4 and found those transactions were riddled with fraud. Among other

COMMONWEALTH GROUP

Counties can stop foreclosures from decimating their communities. Spurred by citizen action groups, they can take action at the local level.

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things, only 16% assignments of mortgages were valid, 27% of the invalid assignments are fraudulent, 35% are robo-signed and 10% violate the Massachusetts Mortgage Fraud Statute. The identity of financial institutions that are current owners of the mortgages could only be determined for 287 out of 473 (60%) and there were 683 missing assignments for the 287 traced mortgages, representing approximately $180,000 in lost recording fees per 1,000 mortgages whose current ownership can be traced. And there is plenty of evidence that what has occurred in Southern Essex County is representative of what is occurring all across the country. OBrien calls his land registry a crime scene and that is probably true nationwide. This does not mean that all foreclosures are illegal or improper, but a sufficiently large percentage of them are, such that county governments need to respond accordingly. So what can be done?

volvement by those citizens groups, helping and overseeing what their local government is doing and ensuring that the government properly serves and takes guidance from its constituents.

Step 1:

County officials and residents must rec-

ognize that the system we have trusted for centuries is fundamentally broken. There is substantial specific as well as anecdotal evidence that fraud and illegality penetrate into virtually every community in the country. The courts are choked with cases that prove that point every day. However, for most people, it has been difficult to accept that our legal and financial system is so corrupted that a substantial portion of the people being foreclosed upon and evicted from their homes are victims of widespread fraud rather than recipients of a punishment that they brought on themselves. We must then recognize the high probability that our local governments have become unwitting partners in this criminal enterprise. Step 1 entails educating county officials to stop being collaborators. That effort may entail letters to the editor, getting local newspapers to write articles exposing this reality, and creating citizen petitions to county elected officials pointing out that our governments should not and cannot be party to such illegal activities. This is neither a left or right issue, but rather a legal and moral one that goes to the heart of our shared belief in fairness and justice. And that moral argument is the strongest tool of the citizenry for demanding that their officials address this problem. Thus the first and most important step that local groups can take is to acknowledge that the system is broken, convince their government officials of that reality and demand that they do something about it. What they can do is the subject of the following steps.

AN ACTION PLAN
The country cannot wait for the federal govern-

ment to initiate a systemic solution to this problem, even though a national forensic study is called for resulting in a global solution. Given that counties represent the governmental entity most closely associated with foreclosures, what is needed is an immediate action plan focused on counties that can be implemented by counties. Our plan spells out what counties and residents can do to address this problem now. The steps are presented from the least complex and easiest to do, through a more complex set of solutions that will take increasing political will, expertise and resources. We recommend that local groups at a minimum initiate steps 1 and 2. The more steps that are put in place, the better for all concerned. Steps 1 through 4 are mitigation measures. They dont necessarily stop foreclosures, but ensure that if they are to occur, that they are legal and the homeowner is protected to the maximum extent possible. Steps 5 and 6 are designed to help to stop foreclosures altogether, while at the same time providing additional benefits to the affected counties. These steps can be driven by citizen action. The scenarios described below should entail close inNational Commonwealth Group |

Step 2:

Following that conceptual shift, the

easiest thing that counties can do is order their sheriffs to discontinue enforcing eviction orders. Given the high probability that foreclosure proceedings leading to a particular eviction are at a minimum defective, if not illegal, the most prudent and conservative thing that the county can do is essentially nothing. Even if the foreclosure proceedings have worked their way

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through the courts and the home has been awarded to the purported mortgage holder, the homeowner may well have been improperly foreclosed upon and at minimum should not be evicted from their home especially by the government that should be there to protect them. This does not take away the rights of the mortgage holder. It merely puts them on hold. Ordering sheriffs to stop evictions is the very least that a county should do while waiting for clarification to filter down from the federal and state governments, which are addressing foreclosure-related legal issues at a systemic level.
5

and thus cannot be trusted to make sure the homeowner is properly notified. After all, a foreclosure translates into an adversarial legal action on the part of the financial institution opposing the homeowner. With that in mind, here is what a county can do to ensure that a homeowner receives proper legal notice of the impending foreclosure, education on the extent of their rights and responsibilities to respond to that notice, and information on where they can get help with their legal response. The first thing the county can do in this proactive mode is make sure that proper, legal notice is given to the homeowner facing foreclosure. This can be accomplished by mandating that all foreclosure notices have to be processed by the county itself, rather than by the foreclosing financial institution. The foreclosing institution could be required to file a notice with the county, which in turn could have its sheriffs deliver the notice in person to the property owner, guaranteeing that the property owner has been served notice by a neutral third party. An additional benefit of having sheriffs deliver the notice is that they can then also make sure that the homeowner is provided with adequate information and education about their rights, including a detailed, step-by-step explanation of what happens following that notice, what the homeowners rights are and what actions they can take to respond to the notice. That should include information on where the homeowner can turn for assistance, including legal aid groups and others. This notification of rights is not dissimilar to the Miranda warning given criminal suspects. If suspected criminals can be afforded notice of their rights, homeowners should be entitled to nothing less. And if the county also mandates that the filing of such notices and delivery to the homeowner be made part of the public record, then local advocacy groups concerned with foreclosures and evictions can be alerted to the fact that a particular homeowner is facing foreclosure. That gives them the opportunity to assist the homeowner in a timely manner rather than, as is currently the case, at the end of the cycle when a last ditch effort is usually unsuccessful. Thus we need to help homeowners much earlier in the process when
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Step 3:

From there the county can take more

proactive steps to get in front of the problem rather than just respond to it at the end of the foreclosure cycle. By taking a closer look at the sequence of events in the foreclosure process, we see where we can step in and further protect the public. An oft-cited problem is the fact that many homeowners do not receive proper legal notification that their home is being foreclosed. Many homeowners first learn that their home has been foreclosed after the courts have awarded the home to the foreclosing party. Horror stories can be found across the country that homeowners did not receive proper notification that their home was subject to foreclosure proceedings and thus could not take legal steps to protect themselves. Even if they do receive proper notification, most homeowners do not know how to respond, nor do they often have the financial resources to hire an attorney to advise them of their rights or act on their behalf in court. Just knowing their rights and properly responding can allow homeowners to forestall foreclosures (especially improper ones) temporarily or permanently. Conversely, untimely or deficient responses, or especially no response on the part of the homeowner (typically within approximately 30 days), can set in motion a virtually irreversible sequence of events that lead to ultimate seizure of the home and eviction of the homeowner. Many foreclosures would not even occur if those shortcomings could be addressed. Financial institutions have all too often botched that process (intentionally or through incompetence)
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the chances of success are greater.

ments would also be subject to prosecution. The potential for criminal prosecutions could go a long way to preventing many illegal foreclosures from even being filed. And in the process, the county could not only avoid being complicit in illegal proceedings, but help to prevent them.

Step 4:

By enacting Step 3, counties can at

least ensure that homeowners have received proper notification and education with respect to their foreclosure proceedings, thereby ensuring that any resultant foreclosures have at least been commenced based on proper legal proceedings. However, this creates an additional opportunity to further ensure the legal integrity of the whole process and to ensure that the homeowner is not victimized. Step 4 could have more profound ramifications with respect to the foreclosure environment. It begins with the county notifying filers that filing false or fraudulent documents under the above notification process could subject the filer to criminal penalties. Further, as part of the requirement for proper notice to be filed with the county by the mortgage company, the county can also require that institution to provide the county with legal proof that they have a clear title and the right to initiate the foreclosure proceedings and seize the property from the homeowner. This addresses one of the most common complaints in courts all across the country, that mortgage companies are initiating foreclosure proceedings in many cases where they cannot prove standing to even commence such proceedings, including the inability to provide the appropriate documentation to show that they are the true title holder to the mortgage and have the right to foreclose. As has also been widely reported, many purported mortgage holders have even supplied fraudulent documents as proof of ownership, and thus fraudulently seize the property.
6

Step 5:

The previous steps contemplate that

foreclosures still take place but help to mitigate the harm they might inflict, on homeowners in particular. However, counties can take steps that will actually eliminate foreclosures. Foreclosures are harmful to just about everyone homeowners, banks, neighborhoods, local governments dependent on property taxes and local economies in general. As we mentioned, Federal Reserve Chairman Ben Bernanke has told Congress that foreclosures are the wrong solution to the housing problem. So if we can eliminate foreclosures, this pervasive harm would be stopped. The question is how. That brings us back to counties. Are they capable of stopping foreclosures? Yes, and like the previous solution, can do so using a layered approach. The first layer entails the county exercising the right of eminent domain.7 Implicitly enshrined in the 5th Amendment to the U.S. Constitution, it is the right of government to seize property from private parties to be applied for the public good. The specific clause states, Nor shall private property be taken for public use, without just compensation. The U.S. Supreme Court has interpreted that clause to mean that governments have the right to seize property, both real and personal property (including contract rights, patents, trade secrets, copyrights etc.) provided that it is to be used for the public (interpreted to include the concept of public benefit) and provided that the property owner is fairly compensated (defined by the courts as fair market value). Most people are familiar with this concept as meaning that the government takes somebodys real property (homes, land, buildings, etc.) and in general the practice is viewed somewhat negatively by the public, and not without some justification. It is not

By having the county require that the mortgage company file evidence of ownership, the entire process can be stopped in the very beginning if the mortgage company cannot provide proper evidence. Not only that, but the filer can be subject to criminal prosecution for filing fraudulent documents. Counties should provide clear and unambiguous notice to such filers that the deliberate filing of fraudulent documents would not only subject the person filing the fraudulent documents to potential criminal prosecution, but those who order them to file such docu-

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uncommon to have governments legally take property over the strong objection of the private property owner. However, in this case, we advocate a variation a nuanced version of eminent domain that seizes only a portion of the property. We expect most homeowners to welcome this approach. Heres why. Normally when a county or city seizes real property, it initiates proceedings against the title holder (usually the homeowner). If the homeowner has a mortgage on the property, he or she is responsible for settling with the mortgage company after receiving the proceeds of the seizure. That might not be enough and is one reason that the homeowner can legally object in court to the amount being offered by the government. If successful in presenting their case for a larger purchase price, they would then normally have to make sure the mortgage holder is made whole. Under our proposed solution, the county would not seize the title to the real property from the homeowner but rather the contract rights held by the mortgage holder (like a bank). Remember that the government can seize personal property as well as real property. A mortgage is the personal property of the mortgage holder. It represents a secured interest in the real property, but not the property itself. The key is that the county could step in when a foreclosure is imminent (which it would know if it follows steps 3 and 4) and instead of allowing the foreclosure to proceed through the courts, it could initiate eminent domain proceedings to seize the mortgage. The process of eminent domain trumps foreclosure proceedings in the courts. Thus the foreclosure proceeding is terminated in the court and replaced with the eminent domain proceedings. By exercising eminent domain in this manner, the county would put in motion the steps to seize the mortgage (a contract), not the physical property. Think of the county as stepping in the shoes of the bank and thereafter becoming the mortgage holder, with the homeowner remaining as the real property title holder. Thus the homeowner is not kicked out of the home. Once that process has been completed, the county would then be in a position to renegotiNational Commonwealth Group |

ate the loan with the homeowner, based on a new set of conditions that could include the price paid by the county, the ability to pay on the part of the homeowner and any number of other factors. The county would be able to renegotiate without a regulatory body like the FDIC looking over its shoulder, something banks cannot avoid and which currently prevents them from renegotiating. This is the holy grail of the mortgage crisis. The current environment makes it nearly impossible to re-align the homeowners obligations, even though the federal government has attempted to put such systems in place. For the most part all such efforts have failed. This particular activity could be administered by a local advocacy group established to help the county and homeowners establish new mortgage agreements. Such negotiations would require specific skills beyond the normal expertise of county governments, but easily found in the community, especially among those who focus on homeowners facing foreclosure, protection remedies and other issues relevant to renegotiations (employment and income status, appraised value of the home, etc.) This use of eminent domain will normally produce a better result for the former mortgage holder than foreclosure, in that they would normally be paid a higher price for the mortgage (remember fair market value) than they would probably realize many months after the foreclosure has occurred, when the former mortgage holder would have been able to sell the property, generally at a fire sale price at best. Thus a county, in solving its local foreclosure problem is actually able to do things that the federal government and others have not been able to do, with a benefit to almost every party involved. There is more to this topic and we would refer you to http:// www.mainstreetmatters.us/solvingforeclosures for a more in-depth exploration. The above solution deals with the issue up front and prevents foreclosure from occurring. What about when foreclosure has already occurred? In such circumstances, counties could use eminent domain to seize foreclosed properties. This and other issues related to foreclosures, too numerous to be addressed here, are detailed at www.mainstreetmatters.us.
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Step 6:

Once a county seizes a contract or

citizens) owns the bank instead of private investors. If a county were to obtain a bank charter from its state (something it legally can do in most states), and did so as a DBA of the county, then the county would then commence its banking operations based on the existing balance sheet of the county. What is so significant about that is inherent in the basic legal rights of banks to literally create credit money solely based on a multiple of their assets. Simply put, if a bank has $10 million in capital, banking laws allow it to create approximately $100 million in credit loans. Thus a county that has at least $100 million in net assets (a typical county many have far more) would be able to generate up to a maximum of $1 billion dollars in credit.** And it does not have to liquidate any assets to monetize its taxpayers assets that have accrued over many decades. Contrast this with many governments that have recently been selling off their assets, often at 10 cents on the dollar, just to get needed financial resources. This topic of public banking and its use by counties to facilitate the eminent domain proceedings is described in greater detail at http://www.mainstreetmatters.us/publicbanking. To download a single document that combines the eminent domain elements described in Step 5, along with the public banking option covered under Step 6, go to http://www.mainstreetmatters.us/docs/No-more-foreclosures.pdf.

piece of real property, it has to pay the former owner the fair market purchase price. Where does that money come from? And is there an alternative to the conventional means by which it can be financed? Governments have a variety of financial tools available to pay for eminent domain purchases. Those could entail individual loans (to the county) for a particular purchase, special bonds for larger projects or even general funds. Much depends on the size of the purchase, what it would be used for and whether the intended use would generate any revenue to pay for the acquisition. Otherwise the government will have to sooner or later pay for the purchase out of its tax revenues. In this particular application of eminent domain, the county would be seizing revenue-generating properties. That is, once the county owns the mortgage, the homeowner or business owner would be obligated to pay the county much like they paid a bank or other mortgage holder. The amount is the only thing in question, and that was covered under the concept of the renegotiated mortgage contemplated above. Given that the county will realize revenue from its acquisition, it is in an even stronger position to borrow funds to purchase those contracts and it may even float a bond issue to provide a special pool for such acquisitions. However, a broader solution would not only provide the county with even more financial resources for such purchases, but also create a financing tool that would have much larger ramifications for the local economy. By taking this next step, the county could unleash a substantial amount of new credit for the businesses and residents of the county, credit that comes from within and not from Wall Street or anywhere else. It can do that by following the lead of the only state in the country that has all the credit it can use, a 3.5% unemployment rate and a solvent state budget. That state is North Dakota and the key to its financial abundance is the fact that the state acts as its own central bank. That is, the state of North Dakota established the Bank of North Dakota as a DBA8 of the state. This form of banking is called public banking wherein a governmental body (and therefore the
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ADDITIONAL ACTIONS
The above steps are intended to provide action

groups with a primer on what can be done at the county level to deal with foreclosures and more. It is therefore not exhaustive. The devil is in the details, and we recognize that individuals and groups wishing to pursue these solutions will need further information, resources and guidance.

* The lending limits of any one county bank would

be determined by the state banking regulator that grants them their charter. Most counties would not use more than a small fraction of their potential. In providing various credit programs to their community, their upper limit would probably never be approached, unlike private banks which frequently push their lending to the limits.
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Main Street Matters intends to provide such information at www.mainstreetmatters.us. Sign up to get on our mailing list and keep checking for further updates on this topic and others. Good luck! Please let us know of your successes and help us share your experience with others.

ACTION PLAN SUMMARY

Step 1:
Local citizen groups convince their government officials that the system is broken and demand that they take action.

Step 2:
HOW TO REACH US
8 www.MainStreetMatters.us

The county directs its sheriffs to dis-

continue enforcing eviction orders. This puts the mortgage holders right to evict on hold while the county waits for legal clarification from the federal and state governments.

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2 info@mainstreetmatters.us
Main Street Matters is a project of National Commonwealth Group

Step 3: The county makes sure that proper, legal notice is given to the homeowner facing foreclosure by mandating that all foreclosure notices have to be processed by the county itself, rather than by the foreclosing financial institution. The foreclosing institution could be required to file a notice with the county, whose sheriffs deliver the notice in person to the property owner, guaranteeing that the property owner has been served notice by a neutral third party.

REFERENCES
Foreclosure Not Best Solution To Housing Crisis: Federal Reserve Report http://www.huffingtonpost.com/2012/01/04/foreclosure-federalreserve_n_1184369.html
1.

From East and West, Foreclosure Horror Stories http://www.nytimes.com/2012/01/08/business/ mortgage-servicing-horror-stories-fair-game.html?_ r=3&emc=eta1
2. 3. 4.

Step 4: The county requires that the mortgage

company file evidence of ownership. This can stop the process at the very beginning. Counties should also notify filers that the deliberate filing of fraudulent documents would not only subject the person filing the fraudulent documents to potential criminal prosecution, but those who order them to file such documents.

http://www.sourcewatch.org/index.php?title=MERS

Register of Deeds John OBrien Releases Forensic Study, Finds Mass Fraud in Foreclosure Docs http:// news.firedoglake.com/2011/06/30/register-of-deedsjohn-obrien-releases-forensic-study-finds-mass-fraudin-foreclosure-docs Attorneys General, Frustrated With National Foreclosure Settlement, Consider Alternate Course http:// www.huffingtonpost.com/2012/01/12/attorney-general-foreclosure-settlement-eric-schneiderman-beaubiden_n_1202643.html
5.

Step 5: The county can step in when a foreclosure is imminent (which it would know if it follows steps 3 and 4) and instead of allowing the foreclosure to proceed through the courts, it could initiate eminent domain proceedings to seize the mortgage.

From East and West, Foreclosure Horror Stories http://www.nytimes.com/2012/01/08/business/ mortgage-servicing-horror-stories-fair-game.html?_ r=3&emc=eta1/
6. 7. 8.

http://en.wikipedia.org/wiki/Eminent_domain http://en.wikipedia.org/wiki/Doing_business_as

Step 6:

The county obtains a bank charter

from its state (something it legally can do in most states), and operates its bank as a DBA of the county. This provides the county with even more financial resources for eminent domain purchases, and also create a financing tool that would have much larger ramifications for the local economy.

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