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Irvington Gains Allies in Standoff with Bankers Over ‘Underwater’ Mortgages

Lenders accused of threatening thinly-veiled version of minority neighborhood ‘red-lining’

foreclosed house

A week after Irvington officials approved a novel effort to help residents get out from under burdensome mortgages, the township has gained allies among public officials and legal groups.

Yesterday, the Home Defenders League and the American Civil Liberties Union announced support for the concept, which relies on the potential use of the township’s power of eminent domain to relieve homeowners of “underwater” mortgages with debt higher than the value of their homes.

In a strike at the finance industry, which has opposed the approach, the two groups released a letter signed by more than two dozen local officials from around the nation asking U.S. Attorney General Eric Holder to investigate a leading trade group, the Securities Industries and Financial Markets Association.

The signees -- including Ras Baraka, a Newark councilman and mayoral candidate, as well as elected officials from New York City, San Francisco and Minneapolis, as well as smaller communities considering eminent domain -- contend SIFMA has threatened to “illegally” restrict loans in communities that use eminent domain on behalf of homeowners. Newark is also considering the use of eminent domain to address the problem of underwater mortgages.

Eminent domain allows governments to acquire property, even from unwilling sellers, for public purposes such as roads or schools. But, in recent decades, it has often aided politically connected private interests, such as shopping malls, casinos or sports arenas.

“Most people who’ve heard of eminent domain have heard of it in a negative context,” said Irvington Mayor Wayne Smith. “But this is a different way of using it. Instead of taking people’s homes, we want to help them keep them.”

On March 25, the Irvington council voted 6-1 to authorize the planning board to prepare a redevelopment plan targeting 199 “underwater” mortgages held by private investment groups, with the goal of acquiring them and offering better deals to the borrowers.

In a teleconference Tuesday, the supporting groups said they approached federal authorities to help Irvington avoid the legal hurdles that have beset the only other community in the country to endorse the use of eminent domain, Richmond, CA.

Last year, the blue-collar city north of Oakland targeted more than 600 mortgages for taking by eminent domain, but legal opposition has stopped the city from acquiring them. In particular, SIFMA officials suggested banks would no longer make loans within Richmond if the city used eminent domain to acquire mortgages.

At the time, Chris Killian, a managing director of SIFMA’s securitization group, explained that using eminent domain for that purpose would scare off potential investors.

“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.”

Discrimination in disguise?

In the letter to Holder and in the teleconference, lawyers and public officials said that policy marks a return to the discredited practice of “red-lining,” by which banks refuse to make loans even to qualified buyers in certain areas, often minority communities.

“After decades of red-lining and years of predatory and discriminatory lending (i.e., reverse redlining), the Wall Street banks that are members of SIFMA are proposing steps that could once again deny credit to – or make credit more expensive for - communities of color,” the letter said.

“It’s clearly illegal,” said John Relman, a prominent Washington, DC,civil- rights lawyer who joined Smith and Richmond Mayor Gayle McLaughlin on the conference call.

“In Richmond, they said that if you have an address in the city, a business or a house, even if you’re not involved in the eminent domain program, you might not get a loan,” Relman said.

As the housing bubble ballooned, many banks engaged in “reverse red-lining,” Relman said, “targeting minority communities for a bad product, bad mortgages with bad interest rates.” After housing values collapsed, he said, “They want to go back to the traditional illegal red-lining, refusing to make loans in these same minority neighborhoods.”

Irvington residents complained of those problems at a township hall meeting with Smith on Monday night, with many saying they have repeatedly tried to negotiate new mortgage deals with their lenders but have been rejected.

Even when banks offer to modify “underwater” loans, the deals are often are not what they seem, said resident Yves Louis. He and his wife obtained a one-year modification from their lender, but at the end of that period, their monthly payments jumped from $1,227 to $2,253, Louis said.

Smith said he met with SIFMA representatives, including Killian, prior to the council redevelopment vote, but the discussion was unproductive.

“I’ll negotiate with anyone who will help us help our people,” Smith said. “I asked SIFMA, ‘What is your prescription?’ and they had no response. They just wanted to kill this (eminent domain) idea with no constructive alternatives.”

A SIFMA spokeswoman declined comment.

Besides looking for Holder to crack down on discriminatory lending, Smith said he and other municipal officials are hoping for a fair hearing from the Federal Home Financing Agency. The FHFA oversees big players in the mortgage market, including the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corp. (Freddie Mac) and the dozen Federal Home Loan Banks.

In a separate letter to the agency’s new chairman, former North Carolina Congressman Mel Watt, the municipal officials congratulated him and asked for a new approach, Smith said.

Under his predecessor, Edward DeMarco, FHFA followed SIFMA’s lead, also threatening to crack down on lending in communities using eminent domain, said Alexander Shalom, a senior staff attorney for the ACLU-NJ.

Last year, the ACLU sued FHFA to get records of contacts between agency officials and representatives of SIFMA and financial institutions. They showed that while municipalities and residents had to use formal “public contact” channels, representatives of the industry groups kept in touch with FHFA management through personal e-mails, telephone calls and in-person meetings, Shalom said.

In particular, he pointed to a June 2012 letter from SIFMA and other banking, title and homebuilder groups to officials of San Bernardino, CA, which also was considering an eminent domain program.

“Such an action would likely significantly reduce access to credit for mortgage borrowers in the San Bernardino area and other areas that undertake similar actions,” the letter said.

A month later, the county executive wrote to Alfred Pollard, FHFA’s general counsel, thanking him for “sharing your thoughts and concerns” about the program and often assurances that the county had “not decided on any particular approach or what role local government should play” in preserving home ownership.

Since then, McLaughlin said Richmond has continued to reach out to other cities. Instead of proceeding on its own with eminent domain, her city hopes to form a “Joint Powers Authority” with neighboring San Pablo and Vallejo, across San Pablo Bay, she said.

“We’re still working through the language with them, but we expect to have something within a month,” McLaughlin said.

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