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A blog about the economy and the Sacramento-area real estate market.

September 3, 2009
Should cities divest from banks that don't modify mortgages?
Sunday Update: Here is the complete story on this and other related bank backlash issues published today.

When the League of California Cities convenes in San Jose Sept. 16-18 for its annual conference, members will take up an unusual resolution aimed at getting banks and loan servicers to step up their loan modification efforts. The idea: cities should yank their money from banks that don't do an adequate job of helping people avoid foreclosure.

Collectively, cities have billions of dollars in banks in California.

Here is the proposal as it appears inside the League 

RESOLUTIONS PACKET  (go to last two pages for the divestiture resolution and background sheet).

The proposed resolution comes from Los Angeles City Council member Richard Alarcon, once a Democrat in the state Assembly and Senate. He introduced the idea in Los Angeles earlier this year, but it hasn't become policy. Now he's taking it to the full dimension of 480 California cities for consideration and debate this month.

We are featuring the idea in a story to run this weekend on how banks are feeling more public sector pressure to modify loans.

This week the City of Elk Grove in suburban Sacramento became one of the first to pass a resolution backing the idea. Vice Mayor Sophia Scherman plans to lobby extensively at the convention to get it passed. In a telephone interview, Scherman said "The banks were willing to lend money to anybody and everybody. Come on down. Consquently, we are left with the foreclosures."

Scherman lives next door to a foreclosed home, and says she senses support statewide for the resolution, especially among inland cities hard hit by foreclosures.

She called it a "drastic time. We have to resort to a drastic solution if that's what it takes to get this thing right side up again. It's time. It's past due," she said. "We should have done this some time ago. Now with the League of Cities, we have a chance to put it out there. It's going to send a very strong message to the (financial) institutions. They will notice. They will take notice from this."

In Los Angeles, Alarcon said some cities will do it, some won't. But he said, "If you count up the money that cities have in banks that's an amazing amount of power. We have never tried to seize it. I am trying to seize it."

At the California Bankers Association, president and chief executive officer Rod Brown called the idea "misguided. The inference is banks are doing nothing."

He said it would only make things worse for the banking industry and the larger economy.

 "I think if a municipal government or a group of governments were inclined to pull their funds away that's really going to have an adverse impact on banks' ability to have deposits and extend credit and trying to help and rebuild," he said in an interview.

Meanwhile, we also talked with finance professor Tony Cherin at San Diego State University about the idea. He said he could understand the cities' frustration, but believes it would be hard for cities to carry it out. The economic downturn has caused so many bank failures and mergers, he said, that there are fewer big banks than ever capable of handling cities' deposits.

In any event, the resolution to be taken up by a series of League committees seems most intent on getting the attention of banks that hold so much power over their constituents. We'll see if this gains traction in the next couple of weeks.


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