Afinds foreclosures and housing vacancies continue to destabilize Newark, and the problems extend well beyond the two small “model neighborhoods” targeted for help by Mayor Ras Baraka.
“This is a problem that kind of spreads out throughout the city,” said Christopher Niedt, an associate professor of sociology at Hofstra University and a co-author of the study, “Our Homes, Our Newark: Foreclosures, Toxic Mortgages and Blight in the City of Newark.”
Without a more comprehensive approach, “We’re still going to see people pushed out of their homes,” Niedt said. That is particularly true for those whose mortgages were packaged into securities sold to investors, a common practice before the Great Recession, he said.
Baraka promised action later this year on a redevelopment plan intended to eliminate blight such as vacant homes. The mayor said it would include a controversial tool, eminent domain, as necessary to bring mortgage payments into line with the housing market.
“We are going to go after some of these distorted mortgages” that have left borrowers paying more than their properties are worth, Baraka told a forum organized by New Jersey Communities United.
The power of eminent domain allows governments to acquire property for public purposes such as roads or schools, even from unwilling sellers. But it frequently has been used to promote private interests, such as shopping centers and casinos.
Baraka acknowledged the tactic raises alarms in many minority communities, which often have been victimized by eminent-domain projects benefitting outside interests. But he said Newark would use it to acquire inflated mortgages, an action which has been discussed in communities across the country but never tried.
“We should be able to use eminent domain to keep people in their homes,” Baraka said.
Nonprofit groups and community activists welcomed the news. But they also suggested other steps the city could be taking.
The city “has the right and the responsibility to use eminent domain to seize” unrealistic mortgages that have been chopped up and repackaged as private securities, said Trino Scordo, executive director of NJCU.
Baraka’s remarks are “a pretty big deal,” said Udi Ofer, executive director of the New Jersey chapter of the American Civil Liberties Union. Previous studies also have documented the prevalence of “predatory” mortgage loans, at inflated interest rates or unrealistic payment terms, in Newark and other New Jersey communities, Ofer said.
“These are really, really, really bad loans,” contributing to continued high foreclosure rates in New Jersey after problems have diminished in most of the country, he added.
Although figures have improved since the depths of the last recession, New Jersey leads the nation or ranks second to Florida in most measures of foreclosure, mortgage delinquency and “underwater” loans, which are those priced higher than the properties are worth.
In the first half of this year, 23,500 new foreclosures were filed in the state, a slight improvement over the first six months of 2014. For comparison, though, for the entire year of 2005, before the housing bubble began leaking, there were 20,253 cases.
The Baraka administration already has identified two areas as “model neighborhoods” where resources will be concentrated on quality-of-life and crime issues, both of which involve vacant housing. They are Clinton Hill, a 38-block grid in the city’s South Ward, and the Lower West Ward, 20 blocks including a stretch of the border with Irvington.
Four of the six Census tracts included in the model neighborhoods are among the 19 in the city with the highest levels of foreclosures, vacancies or underwater mortgages, said Niedt, who is academic director of Hofstra’s National Center for Suburban Studies.
But other troubled properties are just outside the model neighborhood boundaries, or across the city in all directions, as shown on maps developed by Niedt and fellow researcher Stephen McFarland, a visiting professor at the City University of New York.
As the redevelopment plan wends its way through city boards, the ACLU has been urging the inclusion of vacant housing, which often creates public health and safety problems, within the definition of blight to be eliminated wherever it occurs.
“In many ways, this is what eminent domain was created for,” Ofer said.
Eminent domain is usually used against tangible property, but targeting mortgages would be legal, he said. However, litigation by the financial industry is virtually guaranteed, and the potential expense helped persuade neighboring Irvington to halt a similar plan last year.
Regardless of the redevelopment language, Newark should have an opportunity within the next few months to pursue another option to help residents keep homes or find low-cost options among vacant ones, according to housing advocates.
In June, New York Mayor Bill de Blasio persuaded federal housing authorities not to auction off non-performing mortgages there, said Ismene Speliotis, executive director of the Mutual Housing Association of New York. Instead, the city and that agency will acquire them and offer modifications to help the borrowers stay in their homes, she said. The kicker? The NYC initiative is modeled on one pioneered by New Jersey Community Capital, Speliotis said.
NJCC has purchased troubled mortgages in federal auctions, but after Superstorm Sandy tried a new approach, said Wayne Meyer, executive director of the nonprofit, which has offices in Newark and New Brunswick.
In a first, the U.S. Department of Housing and Urban Development agreed to sell some non-performing mortgages owned by federal housing agencies directly to NJCC. The idea was to help Sandy victims keep their homes, even if they needed to rebuild. “We bought 517 mortgages from HUD at market value,” Meyer said, and in so doing created a template for others.
NJCC already has bought troubled mortgages in Newark, providing modifications where possible. In cases where the borrowers already have left, there are often tenants willing to assume a mortgage on reasonable terms, he said.
With the city’s partnership, more could be done, said Meyer, just back from discussions of the issue with federal authorities. De Blasio’s direct engagement with them “is the call Mayor Baraka needs to make” before the next auction of Newark mortgages, Meyer said.
Onerous mortgage terms, disconnected from market values, are “one of the biggest culprits” in Newark’s ongoing foreclosure crisis, according to Niedt. At least 1,151 underwater mortgages in the city have been traced to securities sold off by the original lenders to private investors, he said.
Some 77 percent of these mortgages involve “some type of exotic feature,” including those that effectively prevent the borrower from ever paying off the loan. Red flags include adjustable rates, balloon payments, interest-only payments that do not reduce the principal, or even negative amortization, where the interest charged is higher than the payment, Niedt said.
In 2004-2007, as local housing prices shot up before the recession, 42 percent of mortgages originated in Newark and 48 percent of those in Irvington were “high rate,” at least 3 percent and often much more above the comparable U.S. Treasury rate. In the rest of Essex County, the figure was 21 percent, according to the study.
Because the mortgage-backed securities are often divided among many investors and administered by real-estate trusts, it is often difficult to impossible to negotiate with anyone to modify them to reflect the actual value of homes, Niedt said.
The gap can be significant, Meyer said. For 125 Newark mortgages purchased by NJCC, “the average amount of the loan was $325,000, but the average value of the property was $175,000,” he said.
Moreover, while banks often refuse mortgage modifications to individual borrowers, “they have no problem selling a mortgage at a discount to large private equity firms,” he said.
“We are going to be involved in that struggle” on behalf of residents, Baraka said. But he cautioned that progress “is going to take some time.”