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.Earlier this year, Richmond, Calif., became the first community to endorse the strategy, partnering with Mortgage Resolution Partners, a San Francisco investment firm. Irvington officials said MRP’s “name has come up” in discussions so far, but they will seek a range of proposals.
“Our public procurement process has to be fair, it has to be open, and it has to be competitive,” Smith said.
Three major lenders -- Wells Fargo & Co., Deutsche Bank, and Bank of New York Mellon -- immediately hit Richmond with a lawsuit on behalf of themselves and their investors, trying to block the city from proceeding with offers on 624 high-interest mortgages.
Financial industry groups argue that the use of eminent domain could be unconstitutional, because the mortgages are “intangible property” rather than land or physical structures usually targeted for government taking.
But in 1984, the U.S. Supreme Court allowed the Hawaii Housing Authority to use eminent domain to create a free market in housing on Oahu. In a situation out of the movie “The Descendants,” renters complained that a small number of hereditary landowners distorted the market by refusing to sell houses.
The Supreme Court allowed the authority to act on petitions from the renters, taking their rental contracts and converting them into mortgages.
In 2005, the high court ruled that New London, CT, could use eminent domain to take occupied, well-maintained homes for its economic development authority’s project to lure a Pfizer Corp. plant. Despite the win, Pfizer announced four years later that it would leave the city.
A legal white paper for the Securities Industry and Financial Markets Association raised another issue against Richmond. It suggested eminent domain could deprive investors of “just compensation” if the revenue from performing loans, or mortgage-backed securities, is greater than what Richmond and MRP offer for them.
In September, a federal judge dismissed the banks’ lawsuit without ruling on the merits. U.S. District Judge Richard Breyer said the issue was not “ripe,” because Richmond has not yet carried out the plan.
The same month, Richmond’s city council narrowly approved making the offers, 4-3, but would need a fifth vote to use eminent domain against holdouts. Even before the vote, though, the financial industry followed through on threats to retaliate, snubbing a routine and unrelated bond refinancing effort by the city.
In New Jersey, even beyond federal precedents, “there’s no question” that Irvington’s proposed use of eminent domain is legal, said Udi Ofer, executive director of the ACLU-NJ.
“It’s clear that New Jersey’s constitution, state law and case law empower Irvington to do everything in its power to protect the community from blight, including the use of eminent domain,” Ofer said.
The ACLU has stepped forward “to make sure that they’re not retaliated against” if the eminent domain program proceeds, Ofer said. But he was circumspect about other legal involvement, noting the township “has its own attorneys” to set up the process.
Still, the ACLU has frequently found itself opposing eminent domain proposals. The difference in Irvington, Ofer said, is “racial justice,” creating a real-estate free market by making loans available to local residents at rates that are normal elsewhere.
Big banks historically have been unwilling to lend money in minority communities, and when they do, have tended to funnel even well-qualified borrowers into risky, expensive “subprime” mortgages with interest rates of 10 percent and more, he said.During the housing bubble, investment banks chopped up many of these substandard loans and repackaged them into mortgage-backed securities, which ratings agencies then mislabeled as secure investments. That house of cards began to collapse in 2007, leading to the Great Recession.
In the aftermath, participants said lenders generally have been less willing to negotiate with minority borrowers. Foreclosures are occurring at a rate of 17 per 1,000 households in minority communities like Irvington, compared to 10 per 1,000 in predominantly nonminority towns, according to Ofer.
Irvington’s initiative comes at a time when much of the business media is proclaiming “the foreclosure crisis is over” across the nation. But that’s not true in New Jersey.
In late October, the state surpassed 40,000 new foreclosures cases filed so far this year. That compares to 30,896 foreclosures brought in all of 2012, and is already the fourth-highest annual total since the state courts have kept track.
New Jersey Communities United found that Irvington residents have lost $300 million in property wealth from the local foreclosures and drop in housing values, Smith noted.
“I cannot think of more public purpose” than keeping taxpaying residents in homes and finding new occupants for vacant foreclosed properties, Ofer said.
“This is a good use of eminent domain,” said Mary Szacik of NJCU, an organizer of the eminent domain effort. “Six years into this crisis, we are still seeing people losing their homes.”