Seizing hope and homes in North Las Vegas

To say the idea percolating in North Las Vegas to seize mortgages in danger of foreclosure using the city’s power of eminent domain is controversial would be vastly understating the case.

After all, the city and its private-sector partner, Mortgage Resolution Partners, haven’t actually done anything yet, and already a lawsuit has been filed.

In concept, it works like this: The city would use its power to seize private property under eminent domain to grab a mortgage originally worth $300,000, but now worth $200,000. The city would offer the owners of the mortgage — usually large security trusts — what it claims is a fair-market value of, say, $150,000, using money provided by Mortgage Resolution Partners.

Then, the city would write a new loan for, say, $190,000. The difference would be profit for the city and Mortgage Resolution Partners, with the homeowner enjoying a sizeable reduction in principal, a lower monthly payment and a reduced likelihood of default.

But North Las Vegas Realtor Gregory Smith has sued to block the plan. His lawsuit tracks closely with similar litigation filed against the city of Richmond, Calif., which is also partnering with MRP to seize mortgages. Unlike North Las Vegas, however, Richmond began making offers to mortgage holders earlier this month.

In the Nevada litigation, attorney Bradley Schrager last week filed a motion for a preliminary injunction that lists a host of reasons why the program might run afoul of the law.

■ It’s not a “public use” under the Fifth Amendment, which says “neither shall private property be taken for public use without just compensation.” There was a time when a public use was a road, a school, a firehouse or the like. But after the Supreme Court’s decision in the 2005 case of Kelo v. City of New London, that issue became murkier. The court said the definition of “public use” had changed over time, and as long as the land seized was used for a “public purpose,” the taking was legal. (And, wouldn’t you know it, a “public purpose” is often whatever a state or local government says it is.)

Schrager argues the MRP plan is still illegal, since the public would not benefit and investors would lose out. Otherwise, “any redistribution of wealth or property could be said, however facetiously, to leave the community better off — homes could be taken and given to current renters, cars could be taken and given to current bus riders,” he wrote.

■ As a result of the Kelo decision, Nevada voters amended the state constitution with an initiative that says “public use shall not include the direct or indirect transfer of any interest in property taken in an eminent domain proceeding from one private party to another private party.”

■ Not only that, Schrager argues the city isn’t authorized to seize mortgages outside its municipal boundaries and isn’t allowed to interfere with mortgage contracts.

By contrast, proponents argue theirs is the only viable solution for mortgages baked into giant securities packages, and that eminent domain is the only legal way to write down the artificially high values struggling homeowners will likely never realize. And, they say, the lawsuit was filed simply to fulfill a prediction that the program would result in a flood of litigation.

Byron Georgiou, a former member of the Financial Crisis Inquiry Commission and a director and major investor in MRP, says the action is “nothing more than a publicity stunt.” He says MRP has not been officially served with documents, even though the lawsuit was originally filed at the end of June.

“It looks to me like it was a stunt to prove true their prediction,” he said.

But the fact remains there are serious legal questions about the MRP approach. And whatever way a court eventually rules, to say the result will be controversial is an understatement.

Steve Sebelius is a Review-Journal political columnist and author of the blog SlashPolitics.com. Follow him on Twitter (@SteveSebelius) or reach him at 387-5276 or SSebelius@reviewjournal.com.