This is a land dispute that was litigated in the courts and has nothing to do with the state of Israel. The last legal title owners to the disputed land were Jews. Jordan kicked out the legal title holders in 1948 and they finally got a court to do the right thing after years of litigation.
/bingo
Correct. The land was bought, paid for, and owned by Jews. Not one single acre was gained from force, theft or fraud.
In 1948, after Israel's independence, the land was simply plundered by Jordan. No compensation whatsoever was offered and there were zero attempts to negotiate with the rightful owners. No justification was made for the plunder, beyond the fact that the original owners were now Israeli Jews.
Israel regained sovereignty over the region following its victory in the 1967 war. The Knesset and courts of Israel quite rightly decided NOT to enshrine the prior plunder of Jewish property in territories that Israel now controlled. It would be both a moral outrage and a national humiliation.
But they also didn't want to allow the rightful owners to immediately evict all the squatters. They didn't want to create a population of homeless and embittered people. There were also genuine humanitarian concerns about giving the squatters ample transition time to either find new accommodations or to legally rent or purchase the properties they were squatting on.
The problem is that this "transition" has now been going on for 55 years. You have 3rd and 4th generation squatters who have never paid a dime of rent. Not only is this a form of theft, but it also renders the properties VERY undesirable for development or making major improvements.