January 2014 Featured Article
Funding the Cost of Foreclosure is Everyone’s Expense: Municipalities Seek New Solutions Through Eminent Domain Law
Local government can be a great spawning ground for new and innovative approaches to many problems. Some municipalities, including New Jersey communities, have developed plans to keep families facing foreclosure in their homes by reducing their mortgage payments through the use of eminent domain. Such strategies focus on homeowners who are employed and their ability to pay back the mortgages if alternative repayment arrangements are made. This is important because both the municipality and resident bear a significant portion of foreclosure related costs—a trend that remains high since the housing market collapse five years ago. Urban municipalities especially, bear a significant burden as a result of home foreclosures, where such numbers have reached into the thousands in many communities.
Financial burdens related to high foreclosure rates include administrative and court fees, loss of taxable revenue, decline in property values among the neighborhood, higher risks of blight and abandonment, as well as other public safety and service costs. In some of the most severe instances, foreclosures have cost tax payers tens of millions of dollars in expenses, particularly when the increased fire and police calls, trash removal and maintenance of the now abandoned and vacant homes is taken into consideration.
To avoid future foreclosures, an eminent domain plan would target homeowners with a head householder(s) still employed but behind on their monthly payments to a private label security mortgage. Analysis from Cornell University, which helped to design one of the strategies, indicates that eminent domain would work well in New Jersey as well as nationally because only government has the power to forcibly sidestep mortgage contracts. The plan only targets those mortgages not backed by the U.S. government. This approach is naturally raising significant concerns from the financial institutions that issue them.
Depending on the scope and scale of eminent domain use, a high number of reductions in mortgage payments to banks may discourage investors in backing these types of securities. After private label security mortgage contracts are signed, a municipality would have the power to override the agreement, acquire the loans from bondholders, write them down in payment obligations and give them back to bondholders.
For communities struggling with high concentrations of blight such strategies are receiving pushback from financial lenders who want to see communities everywhere tread lightly on these practices. They warn local officials that these types of policies may jeopardize a municipality’s future ability to access the necessary capital for ongoing housing stabilization efforts and commercial revitalization projects. Historically it has been private label security mortgages that allowed property investors and economic development corporations greater flexibility in development and redevelopment projects than those backed by the federal government.
Despite this opposition, support for this approach is gaining traction in New York, Massachusetts and Washington states. Local social justice groups, which traditionally might be wary of eminent domain’s use, are also endorsing these efforts to assist homeowners suffering from the weight of foreclosures.
Because interested municipalities are still in the study phase of their plans, it is still too early to measure their success. If proven effective, communities across the state and nation will have a new tool to assist homeowners who owe significantly more money than their homes are worth. Reducing the number of foreclosed homes is ultimately as much of a win for local governments as they are for the homeowners themselves. However, like many new and innovative tools, municipalities need to proceed with caution. Such strategies must be fully vetted with the community, lending institutions, legal counsel, homeowners and other stakeholders. Clearly, the approach is not for everyone and communities should be wary of something that might seem like a quick fix, but one which may have longer-term and unintended consequences.
Published February 4, 2014