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NJ Cities Mull Unusual Step to Help Offset Lower Home Values, High Mortgages

Newark, Irvington eye California community’s use of eminent-domain taking to give residents better terms on renegotiated loans.

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In a legal game of chicken being played from California to Michigan to Massachusetts, New Jersey cities may soon be the center of the action.

After a year of debate across the country, Richmond, Calif., last week became the first community to embrace the use of eminent domain to acquire mortgages. And at least two New Jersey cities hit hard by the housing and mortgage crisis are considering the same approach.

Governments normally use the procedure to take tangible property for some ostensibly public purpose, such as a new road or a redevelopment project.

But Richmond officials hope to offer better deals to borrowers whose mortgages are “underwater,” owing more than their homes are now worth. After acquiring the mortgages, the city and its private partner say they will modify them, reducing the loans or rates to reflect current market values.

The finance industry has been waging a high-profile campaign against the step, arguing it would do more harm than good by scaring off future real-estate investors. Industry groups also criticize Richmond for signing on with a private consultant that would share in any proceeds from the foreclosure program.

In New Jersey, where committees in Newark and Irvington are sifting through the legal arguments, advocates including local officials say they expect those cities and perhaps other New Jersey communities to follow suit by the end of the year.

“In some ways, eminent domain may be an even better fit for New Jersey than it is in California,” said Robert Hockett, the Cornell University law professor whose theories have sparked the movement. “Communities here are more desperate.”

The so-called Great Recession hit both states hard. But in the past year, California’s unemployment rate dropped from 10.7 percent to 8.8; New Jersey’s went from 9.8 to 9 percent, according to the federal Bureau of Labor Statistics.

While some California housing markets remain moribund, overall, just 4.7 percent of Golden State mortgages are in foreclosure or at least a year delinquent, according to the latest report by industry analyst CoreLogic of Irvine, Calif.

In New Jersey, 16.7 percent of mortgages are in trouble, the second-worst rate in the nation, the report found.

Still, public officials in the two states make many of the same points.

“Residents here in Richmond have been suffering for years thanks to the housing crisis Wall Street created and which Wall Street refuses to fix," Mayor Gayle McLaughlin said as the city sent notices to 32 lenders, giving them until Aug. 14 to negotiate terms of 620 “underwater” mortgages.

Since housing bubble burst in 2007, the blue-collar community north of Berkeley on the San Pablo Strait has seen hundreds of homes foreclosed, sitting vacant and off the market, according to housing and code officials.

The same thing is happening in New Jersey and is causing “carnage” in Newark neighborhoods, according to Central Ward Councilman Darrin Sharif. The major banks and investment funds that buy up foreclosed properties do “minimal” maintenance, not even cutting the grass at some properties, he said.

“Some of the houses may be boarded up, but they aren’t secure,” Sharif said. “Squatters get in, and when they leave they take copper pipes and anything else that’s movable, making it more difficult and expensive for any new buyer to fix up the properties.”

Sharif chaired an April council committee hearing at which New Jersey Communities United, a community economics group centered in Essex County, presented a report estimating the vacant units have cost the city $56 million over five years due to costs related to fires, crime, trash removal, health and social services.

Last month, Irvington City Council members heard residents make similar points at their own hearing on foreclosures and the housing market. Resident Esmay Parchment told how she bought a home in 2004, only to find code violations, which she paid more to fix.

After she invested $120,000, Parchment said, the recession caused her home to plummet in value. Currently, it is worth “about half what I paid for it,” she said.

But when she sought better mortgage terms, she had trouble even finding out who held the note.

The servicing company, PHH Mortgage Services, eventually offered her a lower interest rate, but only on a new 40-year mortgage, Parchment said.

While many homeowners feel alone when economic woes hit, organized opposition can be effective, attorney Cynthia Johnson told the council. She pointed to publicity surrounding her 78-year-old mother, Susie, whose home in nearby Orange was threatened with foreclosure.

Following public protests, one bank acknowledged it did not have standing to pursue the case. Wells Fargo has taken over the mortgage, but the Johnsons have managed to forestall the foreclosure. Her mother “knows what it’s like to find the American Dream is being taken from you” when, at the same time, investors are buying up homes in the area, Cynthia Johnson said.

About 22 percent of Irvington homes are in foreclosure, double the overall rate for Essex County, according to Toni Bennett, the township’s community development and planning director.

“I have been fighting and working for five years,” Bennett said. “Going out Saturdays knocking on doors, handing out fliers,” trying to tell residents what is happening to their neighborhoods as banks and investors take over properties.

“It’s amazing to hear the things that are happening in our township,” said Councilman David Lyons as residents complained of being rejected for foreclosure aid programs. At the same, he said, “investors are paying a lot more than your homes are worth” to buy properties.

For some in Irvington, that suggests market manipulation to grease the way for redevelopment, displacing long-time residents who have had difficulty getting mortgages modified.

For investors, though, that suggests the normal workings of the market, as investors see opportunity and may even pay a premium over current values. Obstacles such as eminent-domain cases “are going to do more harm to the community than good,” said Chris Killian, a managing director of the securitization group at the Securities Industry and Financial Markets Association.

He noted that Richmond has contracted with a private consultant, Mortgage Resolution Partners of San Francisco, to manage its eminent-domain program.

“MRP’s ability to make a profit depends on them being able to acquire the mortgages at a discount, so the investors would not get full value, and then not pass all the savings along to the borrowers,” Killian said.

“The people they’re trying to take these (mortgages) from are not just going to let them do this,” he said.

“This is the kind of process that takes five years to get a resolution,” so when leaders of a financially strapped city present it as a straightforward solution, “it’s kind of hard to know what anyone’s motivations are,” Killian said.

When the issue arose a year ago in San Bernardino County, Calif., SIFMA presented the county with a legal memo from Walter Dellinger III, the head of appellate practice at the powerful Washington, D.C., firm of O’Melveny & Myers. He argued that MRP’s assumption that many “underwater” mortgages would default, and thus deprive investors of full value, is unwarranted. Moreover, he wrote, no precedent “allows a local government to seize private property and redistribute it to others for the general purpose of improving local economic conditions.”

But Hockett scoffs at the memo, saying it appears intended to overawe governments that do not have sufficient legal resources to do minimal research.

“That memo doesn’t even mention the most important precedent,” the U.S. Supreme Court’s 1984 decision in Hawaii Housing Authority v. Midkiff. That allowed the state to break up an “oligopoly” of a few landowners who controlled most of Oahu, distorting the island’s real-estate market.

“It’s not just relevant, it’s the case that’s exactly on point,” allowing a government to intervene to prevent private investors from manipulating property values and sales, Hockett said. “To ignore it shows that memo is not a serious legal analysis.”

But Killian said eminent-domain advocates do not appreciate a practical effect it might have, scaring off lenders.

“You’re not going to be inclined to put more money into communities where this sort of thing can happen,” he said. “It’s not going to help any of those neighborhoods recover if people can’t get loans.”

But advocates and local officials said that when the financial industry warns “People won’t invest,” it means “We won’t invest.”

“These are neighborhoods that historically have suffered discrimination by the banks through red-lining, the unwillingness to make loans,” said Mary Szacik of New Jersey Communities United.

“Then they pushed people into risky subprime loans, even those who qualified for market rates. And now, lenders aren’t working with the residents to modify underwater loans, but taking homes and letting them sit, waiting for prices to go up,” she said.

Some small lenders appear willing to discuss these issues, including eminent domain, but the big banks have ignored overtures from local officials, Sharif said.

“The big thing we’ve heard from the banks is that they would retaliate, and then there would be a legal challenge,” he said.

Because of that, he said, city officials are moving carefully, with the administration looking to complete a legal review before setting policy. Still, Sharif said he expects the result will be “an early Christmas present” for those pressing for action.

Irvington Councilwoman Charnette Frederic said township officials are awaiting Newark’s findings before deciding what to do. Still, they have added Hockett as an advisor to their local committee.

The public response shows there is a desire for the township to take a stand, Frederic said, “It’s powerful and it’s real.”

“The big thing we’ve heard from the banks is that they would retaliate, and then there would be a legal challenge,” he said.

Because of that, he said, city officials are moving carefully, with the administration looking to complete a legal review before setting policy. Still, Sharif said he expects the result will be “an early Christmas present” for those pressing for action.

Irvington Councilwoman Charnette Frederic said township officials are awaiting Newark’s findings before deciding what to do. Still, they have added Hockett as an advisor to their local committee.

The public response shows there is a desire for the township to take a stand, Frederic said, “It’s powerful and it’s real.”

During three decades reporting in New Jersey, Joe Tyrrell has covered everything from Avon to Zarephath, with a particular emphasis on politics and government, the environment and agriculture. He founded the New Jersey Foundation for Open Government, which unites civic groups, citizens and journalists to promote transparency and ethics.

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