Eminent domain: North Las Vegas plan a risky overreach

North Las Vegas just got a lifeline from the Legislature, a bailout for fiscal woes caused by the recession, fat employee contracts and foolish capital expenditures. Now the City Council is poised to thank the state for that relief by gambling on a misguided, potentially unconstitutional housing rescue plan that exposes the city’s taxpayers to yet more risk.

At Wednesday’s City Council meeting, members are expected to vote on a plan that would allow the city to use its power of eminent domain to seize the mortgages of underwater homes, slash the principal to current market values and sell the reduced notes to new investors. The proposal comes from San Francisco-based Mortgage Resolution Partners, which would handle the write-downs, then collect a fee for each mortgage acquired by the city.

Eminent domain allows governments to forcibly purchase private land if the property is needed for a public purpose, such as roads. Unfortunately, governments in Southern Nevada and elsewhere have a history of using eminent domain to transfer private property to another private owner. Such an abuse led to the U.S. Supreme Court’s atrocious 2005 Kelo v. New London decision, which upheld such redevelopment schemes. Nevada voters responded by putting the Nevada Property Owner’s Bill of Rights into the state constitution — with two-thirds support — and banning the use of eminent domain to transfer property between private owners.

That’s exactly what Mortgage Resolution Partners hopes to accomplish with this plan, with one important caveat: There’s no guarantee a third party will step up and purchase the loans the city acquires. The plan aims to prevent more underwater homes from slipping into foreclosure and further eroding the city’s tax base. But what good will it do North Las Vegas if it snaps up mortgages it can’t unload?

No one can argue that this plan serves a public purpose. Mortgage Resolution Partners gets paid and up to 4,700 homeowners get a better deal, while all city taxpayers assume the costs and risks of acquiring and holding mortgages that may not perform. This is an attack on private contracts and an intrusion into the housing market just as home values are rebounding. Resale prices have jumped about 40 percent in the past year-plus, and they’re still rising.

If this valley’s governments have proved anything over the years, it’s that they’re terrible at making land deals. And given the North Las Vegas Council’s recent track record, why would any investor want to buy a note held by the city? It still faces huge fiscal challenges. The bailout legislation, which allows the city to raid an enterprise fund for sewer upkeep and use the money for general fund expenses, could leave the city with no way to pay for future sewer repairs.

At the very least, the Mortgage Resolution Partners plan is a slap in the face to voters, who overwhelmingly favored limited use of eminent domain by Nevada governments. At the most, it’s another costly overreach destined to land in the ever-growing North Las Vegas Boondoggle Hall of Fame.

The council should tell the company to find another guinea pig for its market-distorting intervention. North Las Vegas taxpayers have been subjected to enough abuse already.