Eminent domain to fight foreclosures is divisiveBy KATIE ZEZIMA , Associated Press
Nov. 23, 2013 1:21 PM ET
IRVINGTON, N.J. (AP) — Using eminent domain to bail out underwater homeowners won't fix all Irvington's problems, but Mayor Wayne Smith thinks anything that can help some residents of his economically struggling township is worth trying.
"It's not a panacea," Smith said. "But it looks like it could help some people."
Irvington is the second municipality in the country to declare its intent to use eminent domain to purchase homes in foreclosure, behind Richmond, Calif. Support for the tactic is gaining traction nationwide in municipalities besieged by foreclosures. Irvington's neighbor Newark, as well as Brockton, Mass., Chicago, and Yonkers, N.Y., have floated or are studying the idea.
But the practice, which gives municipalities the power to circumvent mortgage contracts, acquire loans from bondholders, write them down and give them back to the bondholders, is controversial. It has drawn zealous opposition from Wall Street, real estate groups and some in Washington.
According to Cornell University law professor Robert C. Hockett, who helped devise the plan, eminent domain works because only government has the power to forcibly sidestep mortgage contracts.
The eminent domain plans focus on so-called private label security mortgages, or ones that are not backed by the U.S. government. And that worries some who believe the use of eminent domain could cause investors not to put money in mortgage-backed securities.
"By investing in this type of security, you risk the potential that a municipality, without anything you have control over, says, 'It's OK to take that contract and give it a substantial haircut.' That's the risk you take? It's unquantifiable," said Tim Cameron, managing director and head of SIFMA's asset management group. The group represents security firms, banks and asset managers.
Cameron said that the financial industry wonders if eminent domain could be a slippery slope and that it penalizes people who save and invest.
"Where do you stop?" he asked. "If we do it with homes, why couldn't we do it with credit cards?"
In Washington, Texas Republican Rep. Jeb Hensarling and Calif. Republican Rep. John Campbell proposed legislation that would bar the federal government from backing mortgages in places that use eminent domain to seize mortgages. SIFMA and 11 other groups sent a letter to Congress opposing the use of eminent domain.
Some cities are backing away because of the pressure or legal hurdles in state eminent domain law.
In San Bernardino County, Calif., which floated the plan last year as part of a joint power authority with its municipalities, the blowback from banks was immediate, said county spokesman David Wert, and popular support waned.
"At the end of the day, the joint power authority said we don't have anyone in the county who wants to do it, and we have experts telling us it would be a disaster," he said. "So why would we want to move forward with it?"
In North Las Vegas, Nev., Councilwoman Anita Wood said the state has "very, very restrictive laws" regarding eminent domain, and attorneys found that it simply wouldn't work in the city.
A lawsuit challenging Richmond's plan was dismissed by a California district court judge in September. Moody's Investors Services called the plan a "credit negative" for the city.
But in other places, officials are hoping the plan can help at least a few homeowners whose lives are crippled under the weight of foreclosure and cities that are suffering from blight and scores of abandoned homes. The tactic is gaining the support of social justice groups and, in New Jersey, the state's chapter of the American Civil Liberties Union, which has traditionally been wary of using eminent domain.
Its executive director, Udi Ofer, said the organization consulted with law professors and all believe using eminent domain in this situation would be applicable under New Jersey law.
In Irvington, Smith said only homeowners who are employed and can pay back the mortgages would be eligible. The city is performing a legal study of the proposal.
Chuck Lesnick, president of the Yonkers City Council, said it wants to use eminent domain. Lesnick said he's been talking with other officials elsewhere about the proposal.
"It's really an example of paying Peter without robbing Paul," Lesnick said. "We're allowing people to remain in their homes because of a government action, and it's not costing taxpayers any money."
Here in Irvington, a township of 53,000 where nearly 1,800 homes have been foreclosed on since 2008, there is popular support.
"Eminent domain is the way to go," said Kathleen Witcher of the Irvington NAACP at a Nov. 9 rally. "Eminent domain can work for Irvington."