Local Government and Risky Home Loans

Municipalities from the Central Valley in California to Upstate New York bear the legacy of reckless mortgage lending. Foreclosed homes and toxic titles have caused blight and cost communities billions of dollars. Many cities tried to halt the risky loans by calling on state and federal legislators and regulators to intervene. Some even passed ordinances aimed at curtailing the high-cost loans that were destroying their neighborhoods. Their pleas were dismissed and their ordinances overturned. Ultimately, the subprime crisis played a central role in the great financial crisis when millions of people lost their jobs and, as a consequence, lost their homes too. As a result, municipalities have born the burden of empty, dilapidated homes that pepper once vibrant neighborhoods. A handful of cities have sued financial institutions, attempting to recover their losses. The lawsuits have been complex and expensive, and limits on municipal standing have dramatically restricted the relief cities can recover. At the same time that cities were trying to stop abusive loans, most states and the federal government did nothing to curtail the making of unaffordable loans or the growing number of foreclosures. In the worst cases, governmental entities took steps that fueled risky lending. Later, when the subprime crisis morphed into the foreclosure crisis, state and federal governments failed to adequately assist municipalities. I analyze the legal and regulatory problems municipalities encountered when they attempted to restrict high-risk mortgage loans and when they sought to recover for foreclosure blight. I argue that these problems are the result of a broader, more systemic issue: municipalities are severely limited in their ability to act against commercial interests that cause harm to their communities. In the case of risky mortgage lending, I contend that the sensible policy is to expand localities’ power to protect against actions by financial institutions that threaten or impose costs on communities and I introduce models for local regulation of home mortgage lending