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NJ Town Turns to Eminent Domain to Clean Up Blight of Foreclosed Houses

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.

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