New Jersey Dipping Its Toes Into Underwater Mortgage Pool?

by: Anthony F. Della Pelle
9 Dec 2013

This week, two separate New Jersey related stories surfaced regarding the potential use of eminent domain to seize “underwater” mortgages.

First, the city of Newark has indicated that it will begin researching the viability of a plan to condemn troubled mortgages in an effort to allow struggling homeowners to stay in their homes.  Newark is the second New Jersey municipality to formalize its interest in this plan, joining Irvington which announced it will be studying the underwater mortgage plan last month.  Newark has reportedly seen approximately 7,000 residential foreclosures since the housing market crisis hit in 2008.  Newark officials cite the “unwillingness” of the lending community to take corrective action for loans which exceed the current value of the homes which serve as collateral for the mortgage debt, as the reason why the City wants to move forward with protective efforts to force the lenders to restructure the debt by using government’s awesome power of eminent domain.

The use of eminent domain to seize underwater mortgages was first considered last year in San Bernadino County, California, but the county abandoned its efforts, citing a lack of public support for the program, which program was conceived by a venture capital firm in the San Francisco area.  Vocal opposition from the lending community and mortgage investors also heightened concerns about the constitutionality and viability of the program.  Earlier this year, the City of Richmond, California, revived interest in implementing the plan and actually made pre-litigation offers to buy the loans before condemning them, and other municipalities such as Irvington and Newark have more recently entered the ring, but to date, no government has used its eminent domain power for this purpose.

The second New Jersey-related issue this week involves the filing of a federal lawsuit in California by the American Civil Liberties Union of New Jersey, along with other public interest groups, against the Federal Housing Finance Agency, demanding that the FHFA disclose details about its relationship with banks and other financial institutions. The FHFA has threatened legal action against Richmond and other cities planning to use the eminent domain tactic and may deny credit to locals seeking mortgages, the suit says.   This suit was filed under the federal Freedom of Information Act, and seeks copies of public federal records relating to the efforts of the FHFA to use its regulatory powers over mortgage agencies Fannie Mae and Freddie Mac, which control most residential mortgages in the United States, and also relating to communications between FHFA and various financial institutions, associations and organizations.  The plaintiffs in this new suit contend that the financial industry and lobbying groups have opposed the use of eminent domain to seize underwater mortgages and that such actions may be against the public interest in fair trade and lending practices. 

More information about the lawsuit, including links to the Complaint and other materials, is available on our colleague Robert Thomas’s Inverse Condemnation Blog.

Whether any government will actually commence condemnation of underwater mortgages remains to be seen.  The utilization of this awesome power of government to interfere with and seize private contractual agreements is fraught with constitutional concern and also raises serious questions about whether it is financially viable and will offer any appreciable benefit to the housing market.

Our recent op-ed on this topic in the Newark Star-Ledger discusses the matter in further detail and is available here.

We’ll continue to watch this story closely.