Another city has flirted briefly with the idea of using eminent domain as a tool to help resolve a severe housing crisis. The North Las Vegas, Nevada City Council, however rejected the proposal on Wednesday by a 5-0 vote.
The concept, being promoted by Mortgage Resolution Partners (MRP), would involve the local government purchasing mortgages secured by properties within their borders and with loan balances larger than the value of the property. The loans would be bought from mortgage servicers out of securitized mortgage pools and restructured to reflect actual property values then resold on the secondary market. In most cases the eligible loans would be performing ones. If servicers and the investors who own the loans are unwilling to participate then the local community would seize the loans (with compensation to the owners) using its eminent domain powers.
The idea has been considered by a number of communities over the past 15 months including several in California such as Stockton and San Bernardino; Chicago, and Brockton, Massachusetts and has been strongly and loudly opposed by investors and their trade organizations. The Federal Housing Finance Agency, regulator and conservator of Fannie Mae and Freddie Mac, has voiced opposition and at least one law has been introduced in Congress which would forbid any government entity from purchasing a loan or issuing a loan guarantee in any community which implements such a plan. Most of the communities which were interested have backed off the idea but Richmond, California has sent servicers offer letters for purchasing some 600 loans and has now been sued by investors holding mortgages through Wells Fargo and Deutchbank.
According to Reuters the plan proposed for North Las Vegas by MRP involved the company helping the city to acquire and refinance loans from a group of more than 3,900 mortgages. MRP said the city risks 2,500 foreclosures from underwater mortgages held in private label mortgage securities.
The Association of Mortgage Investors (AMI) and SIFMA which has been the most outspoken critics of the plan, quickly issued statements commending the North Las Vegas decision. AMI Board President Vincent Fiorillo said, "Tonight's council meeting represents a healthy outcome for the local community and economy. As AMI has often explained, the use of eminent domain in this context is untested, untried, and unconstitutional. Its use is fraught with negative economic consequences for the community."
He said recent housing and economic data underscores that the housing recovery is real and underway, including in communities such as North Las Vegas and skewered MRP saying, "(It's) not Robin Hood. MRP is a for-profit business that runs an investment fund. However, this fund does not make investments in the free market. Its business model depends on persuading local governments to use the blunt instrument of eminent domain to take money away from the investments of seniors, unions, and others in the mortgage market, give that money to MRP, and, as a result, lower property values across communities as rates increase on new mortgages."
Timothy Cameron, managing director and head of SIFMA's Asset Management Group said, "We are encouraged that North Las Vegas has decided it will not pursue the use of eminent domain to seize mortgages. SIFMA believes that this use of eminent domain is unconstitutional and harmful to American savers, and could hamper the housing market recovery both in North Las Vegas and around the country.
"Specifically, this misuse of eminent domain would harm the savings of everyday Americans who have money invested in mortgage-backed securities through their retirement funds and other investments. It would also introduce significant new risks into mortgage lending, which could raise borrowing costs and restrict credit availability at a time when our nation needs private capital to return to the housing markets."
