A Spin on Eminent Domain: Newark Considers a Controversial Approach to (Maybe) Stop Banks from Foreclosing

Grace Alexander is one of more than 9,000 Newark homeowners who owe on average $70,000 more on their mortgages than their homes are worth.

Alexander didn't understand the problems with an adjustable rate mortgage and she's ended up refinancing her home six times in the past 12 years – her monthly payment going up each time.

She says she hasn't been able to afford a single mortgage payment in three years.

“I've been trying to get another job but I’m not getting one,” she said.

“I work at a nursing home and it's not easy. I wish Bank of America, the CEO and all of them, could end up at my nursing home so I have to take care of them,” she said. “Then they will see how hard you have to work to put money in their pockets.”

More than 88,000 homes have been foreclosed on in New Jersey in the past four years – 6,810 homes in Newark alone, according to a report, Newark Homewrecker, by the activist group New Jersey Communities United (NJCU). 

During a City Council hearing last week on the impact of foreclosures in Newark, NJCU members asked the city to explore the powers it has under eminent domain to keep banks from foreclosing on any more homes. 

Eminent Domain Explained

Under eminent domain city governments have the power to take property for the benefit of the public.

Activists in New Jersey argue that preventing foreclosures is a public benefit. They want the city to apply the concept to buy homes from banks that are on the brink of foreclosure. The twist: the city would allow the current homeowners to stay in their home. 

“Frankly this is a completely new concept,” says Trina Scordo with NJCU.

"I think there is a lot of research, and a lot of legal research, that needs to go into it and we’re encouraging the city to look into it because it could be feasible," she said.

How it Would Work

The city would enter into a partnership with private investors.

When a house is facing foreclosure, Scordo says a private investor could step in and offer to buy the mortgage from the lender at the current market value. That means the bank would lose some of the money it’s owed, but it wouldn't have to pay for the cost of foreclosing.

Then the private investor would re-sell the home back to the current homeowner at a profit – but for less than the homeowner currently owes.

If lenders don’t want to sell mortgages for less than what is owed to them, activists argue the city might be able to take over the property under eminent domain.

“It's a controversial idea,” says City Council member Ronald Rice.

Foreclosures in Newark have cost the city, and taxpayers, $56 million, according to the NJCU report.  That includes the cost of safety inspections, police calls and trash removal on homes that are sitting abandoned, and the loss in neighboring property values.

When you look at the scope of the problem, Rice says eminent domain “is a tool that we have to really look at utilizing in order to save residents.”

San Bernardino County in California considered using eminent domain in this way, but the Wall Street trade association group, Securities Industry and Financial Markets Association (SIFMA) threatened a legal challenge saying it is unconstitutional and an “impermissible taking of private property.”

County officials in San Bernadino gave up on their eminent domain plans because they said there was a lack of public support.

Historically cities use eminent domain to take private property when it’s for a public purpose or to remove blight. Activists argue that’s exactly what they’d be preventing if they can stop foreclosures in the first place.