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Newark Advances Eminent Domain Plan to Slow Foreclosures

DEC 5, 2013 3:11pm ET
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Newark, New Jersey’s most populous city, is moving forward with a plan that could use government power to seize underwater mortgages to help homeowners reduce debt and avoid foreclosure.

The Newark City Council voted unanimously Wednesday to begin legal research toward a program of making market-value offers on the most toxic loans and reissuing them to homeowners at the lowered amount.

Governments have long used the power of eminent domain to force landowners to sell property for public uses such as highways, and for economic development. Cities in about a dozen states from California and Washington to New York and New Jersey are considering deploying it to help homeowners who owe more than their houses are worth, says Robert Hockett, a Cornell University law professor who advised local governments.

“It encourages banks and trusts that own some of these toxic mortgages to get them off their books,” says Paul Karr, a spokesman for New Jersey Communities United, an advocacy group for troubled homeowners. “In one sense, having the actual cash on hand at fair-market value is more valuable than having an underwater mortgage that’s probably going to go into foreclosure.”

Richmond, Calif., is furthest along in implementing the idea, which is also being worked on in Yonkers, N.Y.; Irvington, N.J.; and Seattle. Asset managers including BlackRock Inc. and Pacific Investment Management Co. and groups representing banks, real-estate agents and builders have objected, saying the move would unfairly hurt investors in the mortgages and damage communities by drying up lending.

In September, a judge dismissed a lawsuit by Bank of New York Mellon and Wilmington Trust Co. that sought to stop Richmond’s program, saying the case came too early to evaluate the legal merits. Bondholders of mortgage loans that Richmond threatened to seize asked a federal appeals court in October review the ruling.

In Newark, a city of 277,000 where one-in-four people live in poverty, there have been nearly 7,000 foreclosures since the housing crisis began in 2008, according to an April report from Karr’s group. Those homes have cost Newark an estimated $56 million for such activities as increased fire and police calls, trash removal and maintenance of abandoned and vacant homes.

“The fact that we, as a City Council, now have to consider this approach speaks volumes about the uncaring tone-deafness of the banks,” Councilman Darrin Sharif says in a statement.

Four U.S. senators, including Pat Toomey, R-Pa., have urged the Departments of Housing and Urban Development and Treasury to oppose the use of eminent domain to lower principle. In a letter to Secretary Shaun Donovan and Treasury Secretary Jacob J. Lew, the group said they should block the Federal Housing Administration from insuring the purchased mortgages.

“Eminent domain may be a local matter, but in the context of seizing mortgages, its use would have national consequences,” the lawmakers wrote in the Nov. 27 letter. “These local decisions could undermine the broad goals, shared by many in Congress and the Obama administration, of stabilizing our nation’s housing markets and drawing more private capital into the housing finance system.”

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