Making the city’s money count

In parts of California, including the northeast San Fernando Valley, it’s hard to find a street without a foreclosed home being sold by a bank. Nationwide, foreclosures in July reached a record high -- one of every 355 homeowners received default or action notices or were foreclosed on.

Foreclosures lower property values, hinder neighborhood safety and lower government revenue. And a single foreclosure can cost up to $34,000 for local government agencies, which have to absorb the cost of inspections, court actions, unpaid water and sewage charges and trash removal fees. We are now six months into the federal government’s Making Home Affordable Program, yet only 12% of eligible mortgage loans nationwide have been modified. That means 88% are still waiting for relief.

It is time for cities to step in and make use of an underutilized source of power-- their finances.

The financial clout of America’s largest cities is staggering. On any given day in the city of Los Angeles, tens of millions of city dollars are held in banking institutions. Los Angeles’ pension funds for city, fire and police personnel -- a total portfolio of more than $25 billion -- are also housed in financial institutions. The City Council needs to think more strategically about investing the city’s funds. Currently, we choose entities based solely on financial considerations. But what if we also judged our banking partners by their commitment to the safety and soundness of our homeowners and neighborhoods?

Earlier this year, I introduced a motion to do just that -- divest from banks that are not actively working with homeowners to modify loans to keep people in their homes.

And it’s not enough for Los Angeles alone to use its financial clout. I’m working to pass a resolution at both the League of California Cities and the National League of Cities encouraging members to divest from banks that are not moving fast enough to help homeowners remain in their homes. If even 10 cities agree -- and one, Elk Grove, Calif., already has -- it will put tremendous pressure on banks and financial institutions to do the right thing. Banks will get the message that the investment of government dollars is a privilege -- one that will be granted only to institutions that are responsible to the communities they serve.

Divestment is part of a larger vision that we need to consider about the future relationship between cities and our banking partners. In the long run, we must not only divest from those institutions that don’t serve our interests, we must affirmatively invest in financial institutions that have a demonstrated track record of community responsibility.

The city needs to develop a new set of criteria for choosing banking and investment partners. Of course, as guardians of taxpayer dollars, we need to consider the security of the investments. But we also need to consider a range of social factors, and there are models for doing so. In Philadelphia, for example, banks that hold city deposits are required to submit Community Reinvestment Act, or CRA, goal statements each year. The statements include such things as where the banks are making loans throughout the city and what kind of loans they are making. Bank performance has improved in Philadelphia’s low-income and minority areas since the ordinance was introduced.

Last week, the City Council’s Jobs and Business Development Committee, which I chair, heard the divestment motion and discussed what kind of factors should be considered when deciding whether banks’ actions were helpful or harmful to the stability of the city. Banks that take actions to reinvest in our communities, such as opening a branch in a previously underserved neighborhood, would receive a higher social responsibility rating and be rewarded with city business. Negative actions, such as failing to meet national goals for modifying eligible loans within a designated timeline, would cause a bank to be rated lower and could eventually result in divestment. To ensure that our city’s dollars are protected, we would only consider institutions that already meet the safety and soundness considerations -- that way we could ensure that taxpayer money was protected and used to improve our communities.

A report on the implementation of this new rating system is being prepared by the City Council’s chief legislative analyst, to be heard at our Oct. 13 meeting.

It’s time for local governments to make a statement to financial institutions: If they continue to stall on foreclosure prevention efforts, we will put our money elsewhere. And in the future, if they fail to responsibly serve and reinvest in our communities, we won’t invest in them.

By beginning to change financial practices today, we will prevent more families from losing their homes -- and put our cities back on track to a prosperous future.