A plan to leverage the city of North Las Vegas’ power of eminent domain to seize underwater mortgages and sell them back to homeowners at a lower price is seen as a financial lifeline for some desperate residents.
But a federal lawsuit filed Friday against the city calls the plan something else: unconstitutional.
The lawsuit by North Las Vegas resident Gregory Smith alleges the plan, orchestrated by the private company Mortgage Resolution Partners, violates due process and equal protection guarantees in the Constitution.
It also alleges the plan would violate restrictions on the use of eminent domain in the Nevada Constitution.
“Eminent domain has to be used for specific public uses,” Smith’s attorney, Bradley Schrager, said Friday. “We think it violates both the federal constitution and the state constitution.”
The lawsuit, filed in U.S. District Court in Las Vegas, asks the court to declare the plan unconstitutional and order the city to pay Smith’s legal fees.
Earlier this month, the North Las Vegas City Council voted 4-1 to enter an agreement with the firm in which it would study how many homeowners could be helped by the controversial program and at what costs. The proposal is set to come back to the council in August, which could choose to broaden it.
Although some homeowners in North Las Vegas — an area where the median home value plummeted from about $260,000 to around $84,000 between 2007 and 2012 — are hopeful they could benefit from the plan, bankers, real estate agents and others have lined up against it.
They fear the seizure of mortgages by the city could cause home values to plunge even further by making lenders unwilling to make loans in the area.
According to the lawsuit, about 5,000 homes in North Las Vegas could qualify for the program and, at $150,000 per mortgage, leave the city on the hook for as much as $750 million if it can’t line up new loans for the owners.
Mortgage Resolution Partners has told the city its investors would cover the financial cost of the program in exchange for a fee on each deal.
Under the proposal, city officials could seize a bad home loan in much the same way it condemns a blighted property.
The city then would agree to resell the homes back to the current residents at a price they can afford, assuming they qualify for a new loan. MRP officials say they would make sure the participants are qualified and cover any costs to the city.
Several cities in California and elsewhere have considered similar proposals, but MRP has yet to close any deals.
Critics say, in addition to being unconstitutional, the program would cover only homeowners who are underwater, yet still current on their payments. It would be limited to homes with mortgages that have been securitized through private lenders and not those made through Fannie Mae or Freddie Mac.
A statement from MRP late Friday said: “It is disappointing that while MRP and the City of North Las Vegas try to help homeowners who are strangling in underwater mortgages, outside forces with no solution of their own to this problem would try to delay this help by tying up our efforts in court. Delays will only lead to more North Las Vegans losing their homes to foreclosure or short sale.”