With many of its residents still beset by mortgage problems, Irvington has become the second community in the United States to adopt the use of eminent domain as a tool to help them keep their homes.
At a fractious meeting Tuesday night, the Township Council authorized the mayor and administration to prepare a novel redevelopment plan to acquire properties with troubled mortgages, with the goal of offering current homeowners better deals.
“We have an opportunity to lead by example,” said Councilwoman Andrea McElroy.
“We have the chance to finally do something that’s going to make people look at Irvington differently,” said Councilman David Lyons.
Last year, officials in Richmond, CA, approved the use of eminent domain to acquire troubled mortgages, and targeted more than 600 properties. But following through requires a “super majority” on Richmond’s city council — and, in the face of legal threats from the financial industry, the votes have not been there.
In contrast, similar discussions in the minority community of Irvington have flown beneath the radar. Its plan aims to avoid the hurdles that have hampered Richmond’s effort by incorporating troubled mortgages into a routine use of eminent domain to redevelop neighborhoods.
Governments throughout the nation are empowered to use eminent domain to acquire property for a public purpose, even from unwilling sellers. Traditionally, it has been applied to widen roads, or obtain land for schools, or eliminate blight.
But especially in recent decades, the procedure has been used to take homes and businesses on behalf of private interests such as malls, casinos or sports venues. Particularly in minority communities often targeted for such actions, eminent domain has developed an unsavory reputation.
Overcoming Fears of Eminent Domain
Irvington residents and officials alluded to this in the build-up to the council vote. But they said the current idea is to acquire mortgages, then offer residents better deals as a way to stabilize neighborhoods. This time, “eminent domain is going to be used to help people keep their homes,” Lyons said.
Many Irvington residents are struggling to do just that. In February, the Mortgage Bankers Association reported that New Jersey has surpassed long-time leader Florida as the state with the most mortgages in foreclosure or delinquent by more than 90 days. Irvington is already dotted with foreclosed or abandoned homes standing empty.
Using real-estate data bought from ABS/Lewtan of Waltham, MA, which provides software and data analysis for the securities industry, proponents of the Irvington plan have identified 199 properties held by “private label securities,” lenders and their investment groups.
Roiled by unsustainable loan practices and mortgage fraud, this segment of the housing market contributed heavily to the bursting of the real-estate bubble in 2007-2008, triggering the so-called Great Recession.
When this house of cards collapsed, sending property values tumbling, the federal government used tax dollars to bail out the banks. But millions of homeowners were stuck with “underwater” mortgages, with debt higher than current property values.
An analysis by the Home Defenders League, an anti-foreclosure network whose members include New Jersey Communities United, found 155 of the Irvington mortgages include “predatory features,” such as very high interest rates, large balloon payments, or debt burdens consuming much of borrowers’ available incomes.
The raw data show some lenders have provided relief, with mortgage modifications valued at $50,000 or more, on eight of the properties. But 124 of the loans carry interest rates of 10 percent or more, with 49 at 15 percent-20 percent.
Before the housing bubble burst, Lyons said, “a lot of people trusted banks.” After the financial markets were deregulated in 2001, many first-time homebuyers received financing that turned out to be too good to be true, with hidden traps, he said.
Lenders and their agents sold mortgages at high interest rates, often to uneducated and unqualified buyers. Banks then sliced and diced these risky loans, packaging them into mortgage-backed securities that were often further divided among many investors. Although clearly speculative, these hazardous investments were endorsed as safe by ratings agencies like Moody’s and Fitch, which are paid by the banks.
“Most banks, before that time, if you went in for a loan and could not afford it, they told you, ‘No’ right away,” Lyons said. “So a lot of people thought that if a bank was telling them they could afford a deal on a home, they could really afford it.”
Before the vote in Irvington, a string of residents and community activists berated the council for not moving faster to address the mortgage issue since a hearing last July. Foreclosures have continued, and many of those homes sit abandoned, creating health and safety issues, they said.
“It is important, because time is of the essence, we cannot wait any longer,” said resident Yves Louis. “Wall Street was bailed out but Main Street is still being tortured.”
“There’s been plenty of time for you to look into it and educate yourselves,” said David Hungerford, chairman of the Coalition to Save Our Homes, which includes the local NAACP, the People’s Organization for Progress, and labor and education groups.
But citing the example of Richmond, several council members said such a complex matter required thorough discussion. Councilwoman Lebby Jones voted against the plan, saying it did not relieve her concerns about the potential cost of defending against litigation from the financial industry.
Richmond is working with a private equity firm, Mortgage Resolution Partners of San Francisco, which would administer the mortgage acquisitions and provide legal defense for the city. Big banks and finance industry groups have challenged this arrangement, saying Richmond cannot pay fair market value for mortgages while building in profit for MRP.
Industry officials threatened to refuse to issue loans to the city or its residents, a practice known as “red-lining.” While that is technically illegal, it remains uncertain whether federal and state authorities would respond. They did not in the first test of the threat, as banks refused to submit bids on an unrelated and routine bond issue with which the city sought to refinance some debt.
Jones said she understands Irvington residents’ anger, because the value of her home has dropped from $270,000 to $165,000. But she said it is her understanding that “once you’re in foreclosure, there’s nothing you can do” legally.
“I don’t want you up in arms thinking you’re going to get something and then be disappointed,” Jones said. “How many times do we get caught up in a rapture and are emotional?”
Councilman Paul Inman voted for the plan, but cautioned that eminent domain is “just another tool” in an effort to fight blight. The measure authorizes the township Planning Board to proceed with the details of redevelopment, but the council would have to approve any funding.
“It’s not going to happen overnight,” Inman said.
“This is just one step,” Councilwoman Charnette Frederic agreed, “but the whole concept is to help our homeowners.”
Relief Programs Fall Short of Goal
The intensified local effort comes in the wake of reports that federal foreclosure relief programs have fallen far short of official targets.
Earlier this month, five major mortgage lenders received official certification that they have complied with their obligations under a $26 billion settlement of foreclosure fraud with the federal government and most states. But the money helped only a tiny fraction of affected homeowners.
Since January 2012, the five big banks — Ally Bank (the former GMAC), Bank of America, Citibank, JP Morgan Chase and Wells Fargo – have paid $6 billion to the states, ostensibly for foreclosure relief. Many states, including New Jersey, diverted portions of these funds to other things.
Meanwhile, the lenders put $20.7 billion toward consumer relief, according to Joseph Smith, the former North Carolina banking commissioner who serves as national monitor of the settlement. When the deal was announced, federal and state officials said the money would help roughly 1 million homeowners.
Data from the monitor’s office indicate that 171,663 homeowners received modifications of first mortgages or refinancing, “the two categories of relief where people are likely to have kept their homes,” according to a spokeswoman for the Office of Mortgage Settlement Oversight.
But the numbers also show that at least 182,728 participants lost their homes through short sales or by surrendering their deeds to lenders, who received credit for this under the settlement. Banks’ self-reported claims of state-by-state relief, as well as the monitor’s national findings, can be viewed here.
During the same period, banks completed foreclosures on 1.45 million homes, according to the real-estate analytics firm CoreLogic of Irvine, CA. Much of their credited consumer relief amounted to such moves as forgiving second mortgages, often done among lenders as a courtesy to speed the foreclosure process.
While the settlement would have given the banks credit for loan forbearance to borrowers who lost their jobs, an issue in high unemployment areas like New Jersey, none reported doing so, according to the monitor.
Meanwhile, the U.S. Department of Justice has released an internal audit showing it vastly overstated its success in curbing mortgage fraud, and continued to cite the inflated numbers even after the errors were uncovered.
For example, at an October 2012 press conference, department officials claimed to have filed criminal charges against 530 people responsible for more than $1 billion in mortgage fraud. But the real numbers were 107 defendants and $95 million, according to the audit report.
At the same time, the FBI received a $196 million appropriation to combat mortgage fraud, then classified that as its absolute lowest priority in the lowest-priority category for criminal investigation and cut the number of agents assigned, according to the audit, which can be read here.