Brockton is exploring using eminent domain powers to seize bad mortgage loans that have devastated many residents and, with a private financial partner, sell them back at lower interest rates to help people keep their homes.
Known for having the highest foreclosure rate in the state, Brockton has 7,000 homeowners currently “underwater,” or living in homes that are valued below their mortgages, said City Councilor at Large Jass Stewart, who proposed the untested measure.
In December, after hearing from Stewart and other advocates, the City Council’s finance committee unanimously agreed to form a study group to look into the idea. Committee members will create the group at a meeting Monday , Stewart said. A report on its findings is expected in the spring, he said.
A government traditionally uses eminent domain law to take private property for public use after compensating the owner. If the mortgage seizure program is implemented, Brockton would be the first city in the nation to do it, proponents said.
But some are already urging city officials not to go down that path.
“It would be very hurtful for the industry,” said Deborah Sousa, executive director of the Massachusetts Mortgage Bankers Association. “You couldn’t sell a mortgage on the secondary market.”
The association represents about 185 lending institutions, including banks and credit unions as well as mortgage banker/lender companies, mortgage brokers, and all ancillary companies, she said.
“We understand the emotional toll that foreclosures have on individual consumers and their families, and we recognize the destabilizing impact on neighborhoods as well as the overall economy,’’ she said. However, such an “unprecedented” use of eminent domain law would dry up the availability of mortgage credit in the community, triggering a downward spiral of home values for consumers the proposal seeks to help, she said.
Investors who remain will be forced to raise mortgage rates as they grapple with pricing an inherently unpredictable risk, she said.
Sousa said reducing foreclosure backlogs, creating a stable environment for private capital, and ensuring access to credit for qualified homeowners are the ways to avert crisis, “not hasty solutions like eminent domain.’’
Stewart’s initiative would affect securitized loans, or those sold to investors. The goal is to return business to local banks by buying the loans and refinancing them locally at rates residents can afford, said Grace Ross, director of the Massachusetts Alliance Against Predatory Lending, a statewide coalition of 65 member and supporting organizations.
Using the seizure program to reduce mortgage interest rates on 1,500 bad loans in Brockton could result in $15.6 million in savings for the property owners, money that would be pumped into the local economy, she said.
Stewart proposed the seizure initiative after attending an “eviction blockade,’’ in which he said friends and neighbors tried, but failed, to stop a bank from removing a family from their foreclosed home.
“It was just heart-wrenching to see that unfold,’’ Stewart said.
According to the Plymouth County Registry of Deeds, Brockton’s situation is brightening slightly. In 2010, the city has 422 foreclosure deeds filed, and 766 orders of notice issued. In 2011, those numbers fell to 281 foreclosure deeds filed and 500 notices issued, and last year, there were 266 foreclosure deeds filed and 489 notices issued. But residents are still struggling, Stewart said
City officials said the study group will explore legal ramifications of the seizure measure and figure out who would coordinate it. Among those offering advice is Mortgage Solutions Partners LLC, a New York firm that helps communities acquire underwater mortgage loans and refinance them.
Some Brockton officials, including Mayor Linda Balzotti, say they have doubts about seizing mortgages by eminent domain.
Balzotti said she was deluged with calls from area banks and trade associations that said they would be reluctant to offer local financing in a city where properties might be taken by eminent domain. She also said she is not open to using public money for such a proposal.
But Stewart and others said the proposed scheme would pay fair market value for the loans, reimbursed by private financing, which would return the customers to local banks.
“To us it is very straightforward,’’ Ross said. “We wouldn’t be in this mess if loans weren’t underwritten by mortgage companies.”
Balzotti said Brockton already has initiatives in place to help residents in foreclosure, including a task force that connects homeowners with their bankers to work on problems. “The fact that no other community has done this could mean there are underlying issues we don’t know about,’’ she said. “Hopefully, that will all be vetted out by the working group.”
A few cities have implemented meaningful changes in attempting to help residents hit with foreclosure, Stewart said, including Worcester and Springfield.
Worcester officials created a “vacant and foreclosed properties” ordinance three years ago that forces lenders to register each foreclosure and put down a $5,000 bond assuring the property will be maintained. Springfield passed two ordinances that require preforeclosure mediation and mandate maintenance of vacant and foreclosed housing. Lenders are held liable with potential fines of $300 per day for noncompliance, and a $10,000 bond is required for each vacant or foreclosed property.
Brockton’s finance director, Jay Condon, was initially skeptical about the eminent domain idea, but said he is open to listening. Assuming the city receives assurances of the legality of the measure and financing structure, Condon said he can envision Brockton going to bid for a private partner or partners to pay the city for those loans.