A New Jersey town is exploring a radical approach to helping homeowners who are underwater on their mortgages, indicating that the solution that began in California may be spreading to other blighted cities.
Irvington, NJ announced Saturday that it is exploring the possibility of taking over distressed properties by using the power of eminent domain, rewriting the mortgages so that they are affordable for the current residents, then giving the renegotiated mortgages back to the banks that own them now. The plans amounts to a forceful write-down of homeowner debts, which benefits residents by keeping them in their homes and salvaging the value of their single biggest financial assets. That in turn benefits Irvington as a whole by propping up tax revenues and preventing a further slide in property values. If the plan moves forward, the city would act to salvage as many as 1,000 mortgages.
Irvington is the second city in the country to announce such a plan, following Richmond, California, though eminent domain has not actually been used in this way to date because the matter is bound up in court. When Richmond announced its plan earlier this fall, lawyers for Bank of New York Mellon, Blackrock, and other investors that would see lower returns as a result of the forceful renegotiations sued to block the city from moving forward.
If the idea were to spread more widely, it could mean relief for the millions of Americans who still owe more on their mortgages than what their houses are worth. But that relief would come at the expense of powerful financial concerns, and both Wall Street and the Federal Housing Finance Agency (FHFA) have threatened to freeze or reduce lending in places that use eminent domain to rescue borrowers.
Banks and other financial firms with a stake in the overvalued mortgages have generally declined to renegotiate underwater loans in ways that keep people in their homes, often preferring to move to foreclosure. Many investors prefer to sell distressed loans to unscrupulous firms like Nationstar that look to buy the mortgages at a low price and then quickly foreclose on the homes and flip them for profit. This has led to an epidemic of wrongful foreclosures. It has also has meant that hard-hit communities like Irvington and Richmond cannot break out of the negative economic cycle created by mass foreclosures — a cycle in which citizens slide into poverty, property tax collections collapse, and city services become unaffordable. Legal settlements designed to end mortgage company abuses have failed to change the industry’s behavior, leaving millions of people at the mercy of their banks.