Irvington has become the second municipality in the country -- after Richmond, CA -- that is attempting to convert eminent domain into a tool to help homeowners deal with neighborhoods blighted by foreclosed houses. But local officials acknowledge that they need partners in order to make the idea work.
In a state where foreclosures are again soaring, the results have been especially damaging to Irvington, a blue-collar community of 53,000 neighboring Newark, according to Mayor Wayne Smith.
Since 2008, lenders have foreclosed on at least 1,775 homes in the township, driving out residents and leaving even well-kept neighborhoods dotted with boarded-up buildings, he said. Many other homeowners are “underwater,” paying more on high-interest mortgages than their properties are worth, according to Smith.
A report this summer by New Jersey Communities United found Irvington has spent $14 million to respond to increased crime, fires, and health hazards related to vacant homes. That is happening even as property values dropped and property taxes rose along with successful tax appeals, according to Councilwoman Andrea McElroy.
Residents complain that banks are unwilling to work with them to modify mortgage loans, federal programs are confusing and inadequate, and the state has actually diverted money intended to help homeowners with the foreclosure crisis.
So at a rally Saturday at city hall, Smith announced Irvington intends to jump into the real-estate game with an initiative he called “friendly condemnations.” The idea is to acquire abandoned homes, as well as still-occupied ones with inflated mortgages, and then offer residents better deals. Eminent domain would enable the township to purchase the homes for current market rates, which would be less than the mortgages may be worth, sometimes against the mortgage holders will.
But like other financially strapped communities, Irvington is “not in a position to do this ourselves,” Smith said. “We do need a third party to step up” and invest in the program, he said.
The lure for potential investors is the municipality’s willingness to use its power of eminent domain to acquire existing mortgages to provide investment properties, Smith said.
Eminent domain allows governments to acquire property, even from unwilling sellers, for “public purposes.” Over the years, though, courts have defined those purposes broadly, from building highways or sewer lines to privately owned shopping malls and casinos.
Smith acknowledged that history has given eminent domain has “a bad name” in minority neighborhoods often targeted by projects that benefit others. This time, though, it offers a potential lifeline for residents struggling to keep their homes and a town trying to preserve its neighborhoods, he said.
The next step is “engaging with the financial community” to create the investment process, he said. The selling point will be that fair-market mortgages are profitable and more stable as investments than those set at inflated housing values and unsustainably high interest rates, he said.
In an indication of the program’s potentially difficult path, Smith used the rally to give out his office phone number, inviting investors to call.
Still, the mayor professed optimism about the chances of success. While major banks have bad reputations for predatory lending in minority communities, “not every investor is on Wall Street,” Smith said, “there are some good guys.”
To sidestep one potential legal and political problem, Smith said the program would aim at the township’s roughly 1,000 “private-label” mortgages. Those are held by banks and investor groups, not by government agencies such the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corp. (Freddie Mac).
According to Smith, concentrating on private-label mortgages, will avoid "the potential legal complication of trying to condemn mortgages underwritten by government agencies such as Fannie and Freddie."
On its ways to this new approach, Irvington already has achieved one first. The American Civil Liberties Union announced it will “stand beside” the municipality against an expected legal challenge from the mortgage industry.