Resolving underwater mortgages through eminent domain? The plan comes to Southern Nevada

A controversial method to help underwater homeowners by deploying eminent domain is coming to Southern Nevada.

The effort is being pitched to local municipalities and will be on the North Las Vegas council agenda next week. The agenda item asks the council to approve an agreement with a national group called Mortgage Resolution Partners.

For months, local business folks now affiliated with MRP have been briefing elected officials and others about the plan, which has been embraced in some small California communities but nowhere else. Among the locals involved are Byron Georgiou, the erstwhile Senate candidate and businessman who was involved in the complex Enron litigation; longtime developers Mike Saltman and Richard Plaster; and entrepreneur Danny Greenspun. They have hired public affairs/public relations giant R&R Partners, too.

The idea is somewhat complex but involves a city, without risking any of its own money, using its eminent domain powers in concert with MRP so it can engage in a friendly condemnation with the mortgage-holders. (Yes, therein lies the rub.) The endgame is to keep residents in their homes, which has a benefit to the municipality, too.

Here’s how it would work, as described in Politico:

Under the plan, MRP will put up the money for local governments to seize the mortgages out of securities owned by private investors at fair market value using eminent domain powers.

MRP would help determine which loans to select. It would handle writing down the appropriate amount of principal and getting the mortgage refinanced into a new one backed by the Federal Housing Administration, though agency officials have said they have concerns about the plan.

Investors in MRP would profit from the difference between what is paid to seize the loan and the revenue gained from the refinanced mortgage, plus a $4,500 advisory fee MRP will charge local governments per loan.

The concept is innovative, and nowhere could it be more useful than the place where the biggest housing boom in the country’s history went bust about five years ago. But it is also controversial as The Wall Street Journal, Mother Jones and others have reported.

Just the phrase “eminent domain” will raise hackles in some quarters. As Josh Harkinson pointed out in Mother Jones, "Politicians are understandably reluctant to resort to what is essentially the nuclear option for rescuing beleaguered homeowners."

On the other hand, some might argue that if bankers hate it, how can it be all bad? As Harkinson wrote, the mortgage investors who wrote to San Bernardino officials considering the idea sounded like Occupy protesters, saying the idea was "simply a wealth transfer from everyday Californians to a handful of wealthy, well-connected investment bankers."

San Bernardino seriously considered the plan before a lack of public support scuttled it. But other California communities – La Puente, El Monte, San Joaquin and Orange Cove – have signed up, and an estimated 2,700 mortgages have been affected.

I am sure lawsuits will be threatened, financial apocalypses will be foretold. And lobbyists will have a field day, too.

North Las Vegas, which has been devastated by the foreclosure crisis, is a good place to start. So it will be interesting to see whether that city is the first domino to fall in Southern Nevada or becomes the first obstacle to MRP’s foray into the valley.