Bringing pain to eminent domain

The North Las Vegas City Council had no shortage of reasons to reject a plan to use the city’s eminent domain powers to seize underwater home loans:

The preliminary agreement with the firm Mortgage Resolution Partners, entered earlier this summer, is obviously unconstitutional under a property rights amendment approved by Nevada voters. It exposes a municipal government on the verge of insolvency to huge financial risks. It already has sparked litigation, with additional costly lawsuits looming. And whatever relief might result benefits too few residents at too high a cost.

Last week, the City Council was given a new, far more powerful reason to get out of the deal when it comes up for a final vote this month: It could halt almost all mortgage lending in North Las Vegas, destroying the city’s emerging housing recovery.

The Los Angeles Times reported Friday that the Federal Housing Finance Agency, the country’s top home loan regulator, announced it would instruct federal mortgage holders Fannie Mae and Freddie Mac to “limit, restrict or cease business activities” in any area that uses eminent domain to swipe mortgages from investors. Considering Fannie and Freddie gobble up nearly nine out of every 10 mortgages written, such a step could block anyone who needs a loan from buying a house in North Las Vegas, sending home prices crashing again.

The California city of Richmond is moving forward with Mortgage Resolution Partners and already has been sued by Fannie Mae, Freddie Mac and Wall Street firms to block eminent domain takings. The federal threat to block home loans clearly was directed at Richmond, but it applies to North Las Vegas as well.

Eminent domain is an extraordinary government power that’s supposed to be used only when private land is needed for public purposes, such as highways or other infrastructure. Too many governments — including ones in Nevada — have used eminent domain to transfer private land to another private party, a practice upheld by the U.S. Supreme Court’s putrid Kelo v. New London decision. That ruling prompted Nevada voters to explicitly ban such transactions.

But Mortgage Resolution Partners clearly believes a loophole exists in that iron-clad amendment. Under its plan, North Las Vegas would seize underwater mortgages, make investors eat huge losses by paying only the property’s current value, then let lenders, backed by other investors, write new mortgages under terms that are more favorable to the homeowner. Mortgage Resolution Partners would be paid $4,500 per transaction.

Supporters of this scheme claim the “public” benefits of the deal are more stable neighborhoods and fewer potential foreclosures. In fact, the opposite will be true if federal authorities make good on their threats. This plan will bring a new wave of hurt on North Las Vegas.

Right now, the members of the North Las Vegas City Council are children playing with matches on a Mount Charleston campground. New Mayor John Lee must provide the leadership voters desperately wanted. Let the city of Richmond fight this battle. North Las Vegas can’t afford to be the guinea pig.