As Newark became the second New Jersey city moving tentatively to help embattled homeowners avoid foreclosure, the American Civil Liberties Union of New Jersey made good on its promise to put some legal muscle behind the effort.
The state ACLU on Thursday joined its Northern California counterpart to file a Freedom of Information lawsuit against the Federal Housing Finance Agency on behalf of community groups around the country, including New Jersey Communities United.
The suit seeks documents and files relating to the FHFA’s threats to take action against cities -- and their residents -- that consider the.
On Wednesday, the Newark City Council stepped into FHFA’s danger zone. Following the lead of its counterpart in neighboring Irvington, council members unanimously agreeing to draft an ordinance for “principal reduction,” lowering the debt on local mortgages held by private lenders.
As a practical matter, this could include eminent domain, which governments use to acquire property, even from unwilling sellers, for a public purpose. Normally, this involves thing like taking land for roads and sewer lines. But the courts have applied the principle broadly, extending it to private development such as malls and casinos.
Like Irvington and Newark, cities around the country are considering the use of eminent domain to acquire “underwater” mortgages, whose debt load is higher than the value of the homes. The idea is to offer the homeowners new deals that reflect current property values, reducing the loan principal.
Despite the legal precedents, the financial industry strongly opposes applying eminent domain to underwater mortgages, arguing this could harm the investors who hold them and erode banks’ willingness to make any sort of loans in those communities.
Big banks have twice tried to sue the first city to approve the use of eminent domain, Richmond, CA. The courts have dismissed both cases, but not on their merits. The matter is not “ripe” for the courts because Richmond is still trying to negotiate for its 624 targeted mortgages, and has not yet used eminent domain.
In Newark, banks also have forced the city’s hand by their reluctance to work with local homeowners or officials, according to Councilman Darrin Sharif, who pushed for the principal reduction plan.
“The fact that we as a city council now have to consider this approach speaks volumes about the uncaring tone-deafness of the banks,” Sharif said in a statement.
“I hear from homeowners almost every day of the week about this issue,” said Councilman Ras Baraka, like Sharif a mayoral candidate. “They feel bullied by the banks. They feel threatened by the banks.”
Since 2007, when the national housing bubble burst, lenders have brought roughly 300,000 foreclosures in New Jersey, including 45,000 so far this year. In places like Irvington and Newark, residents and officials complain that lenders have left many of those foreclosed properties vacant, creating fire, crime, and health hazards.
In Newark alone, where there have been more than 7,000 foreclosures in the past five years, the city has spent an additional $56 million responding to those related problems, according to a study earlier this year for New Jersey Communities United.
To the surprise of some, the Obama Administration has not supported municipal efforts to reduce foreclosures. The FHFA has taken a particularly tough stance, rebuffing calls for its agencies to offer mortgage modifications to underwater homeowners.
The FHFA oversees the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), two government-sponsored entities that guarantee a majority of mortgages in the country, as well as the 12 Federal Home Loan Banks. In the run-up to the Great Recession, Fannie and Freddie accepted many of the riskiest mortgage loans from private lenders, requiring massive bailouts.
In August, the FHFA released a statement that it “may take any of the following actions:” legal action against communities whose use of eminent domain affects its entities; order its agencies to cease business in those places, or take “other actions as may be appropriate to respond to market uncertainty or increased costs created by any movement to put in place such programs.”
Udi Ofer, executive director of the ACLU-NJ, said the statement raised eyebrows because the agency seemed to be intervening in a matter beyond its authority.
“The FHFA statement was very surprising, because all of the communities considering eminent domain have made clear that it would involve only ‘private label’ mortgages, held by banks or investors, not those backed by Fannie or Freddie,” Ofer said.
While the Richmond City Council approved making offers on mortgages and Irvington and Newark have agreed to proceed with plans, Seattle, Yonkers, New York City, and El Monte, CA are discussing the idea, but other cities in California, Nevada, and Massachusetts have decided not to move ahead with eminent domain.
The FHFA statement influenced those decisions, and other ongoing discussions, Ofer said. The community groups have a right to know why the federal agency seems to be supporting financial industry groups in opposition to local governments, he said.
“I would tell you that in the conversations I have had with public officials throughout the state, they absolutely worry about what the FHFA is saying,” Ofer said.
Under those circumstances, as a matter of government transparency, “it’s incredibly important for the public to understand what the FHFA’s concerns are,” he said.
So in October, the community groups requested records of agency leaders recent discussions and meetings on eminent domain with a range of big banks, investment companies, financial industry groups, and others.
But, Ofer said, FHFA did not even respond to the FOIA request, although by law it is required to do so. So ACLU chapters from areas where there has been the most municipal interest in eminent domain, California and New Jersey, joined forces to sue, he said.
The suit can be.
“Under the law, the FHFA has a duty to help struggling homeowners, not become an obstacle,” Ofer said.
An FHFA spokeswoman said the agency has no comment on the suit.
In July 2012, Edward DeMarco, the agency’s acting director, said, "the anticipated benefits do not outweigh the costs and risks" of using eminent domain. The agency offered a further explanation the following month, in a statement suggesting the impact could be “a chilling effect on the extension of credit to borrowers seeking to become homeowners and on investors that support the housing market.”
An FHFA legal memorandum issued 13 months later dismissed the cities' stated intent not to include Fannie and Freddie mortgages in eminent domain programs in a footnote saying, “this does not address investments in securities” the two might hold.
The memorandum by the agency’s general counsel, Alfred Pollard, elaborated that eminent domain could be used not only against mortgages packaged into private securities, but also against those held by lenders in their portfolios. The memo also repeated banks' arguments that the Richmond program could unfairly deprive investors of full price while imposing administrative or other costs.
But ACLU officials said eliminating the blight caused by foreclosures is a valid public purpose, with the potential to positively affect housing values beyond the immediately affected homes. They pointed out that many of the affected communities are minority neighborhoods still struggling to recover from the recession.
"The FHFA has taken an aggressive stance on this issue in a way that has harmed minority communities," said Linda Lye of the ACLU of Northern California, who is the lead counsel on the suit.
President Obama recently tried to replace DeMarco with Rep. Mel Watt (D-N.C.), but a Senate vote in October fell short of the margin needed to prevent a filibuster and it is uncertain whether the chamber’s revised rules will make this easier.
The ACLU suit asks for information about the agency’s eminent dealings with four banking and securities organizations, the American Bankers Association, the American Securitization Forum, the Securities Industry and Financial Markets Association and the Association of Institutional Investors.
The request also covered interactions with other industry groups and major investment firms, the California Mortgage Bankers Association, the California Mortgage Bankers Association, the Investment Company Institute, the Financial Services Roundtable, the National Association of Home Builders, DoubleLine, BlackRock, and the Pacific Investment Management Company, several of which figure prominently in the California and New Jersey markets.
The requestors also sought information about FHFA management’s discussions of eminent domain with representatives of the big banks that are most active in mortgage loans and foreclosures: Wells Fargo Bank, Deutsche Bank, Bank of America, Ally Bank, Chase Bank, and Citigroup.