Proponents of eminent domain cause a political stir in North Las Vegas

The controversial proposal isn't dead, yet

It’s easy to paint a picture of North Las Vegas in the mind of an outsider.

The city’s official website offers visitors an image of a city surrounded by majestic mountains and desert valleys.

But take a closer look, and it’s also a city plagued by the aftermath of a foreclosure epidemic that swept through Nevada post-2008, leaving many remaining homeowners underwater and struggling with their payments.

Jump ahead a few years post-2008, and it’s no surprise to attorneys like Abran Vigil with Ballard Spahr – who has been involved in the local eminent domain issue – that this desert city is the next to consider the use of eminent domain to seize mortgage notes for the purpose of restructuring them to help underwater homeowners.

But this desert town, like others before it, is reacting – with controversy brewing from all sides. Some advocacy groups are supporting the provision, while Realtors, property owners and even some new members of the city council view it as a big-brother grab in a state known for protecting property rights.

The controversy sparked up when consultancy firm Mortgage Resolution Partners (MRP) came to town and gained the attention of city officials by proposing a plan that has already been brainstormed in areas such as San Bernardino County, Calif.

The plan is not in effect since it still requires city council approval, but the mere consideration of an eminent domain proposal to save underwater homeowners sent the real estate industry into advocacy mode.

"From our observation, there is no overwhelming support for it," Vigil said. The big problem, he adds, is that it’s unclear how the plan would actually work or how it would be funded.

"They would have to gain access to some money from somewhere in order to exercise this power of eminent domain and give just compensation to the mortgage holder," he told HousingWire. "Where the money comes from is really up in the air."

Vigil says the materials released thus far suggest no taxpayer money would be used – only private funding – but the details of how the financing would be obtained is unclear to him at this point.

What is clear is just how much controversy is tied to the idea of using eminent domain in this way.

"Simply the fact that they may lose a mortgage note that’s going to be taken through a government action is equally disturbing to the lending industry," says Vigil.

He added that Nevada has specific statutes governing eminent domain issues, and there was even a change to the Nevada Constitution to give property owners more protection from eminent domain takings.

But whether the plan sticks is more political than technical. Vigil points out that the North Las Vegas city council just seated new members – a change that could shift how much leadership support exists for an eminent domain deal when it’s actually up for a vote.

Sean Fellows, government affairs director for the Greater Las Vegas Association of Realtors, says the previous city council in June signed a 60-day agreement with MRP simply to get more answers about the plan.

Not long after the deal was struck, the face of the city council changed after election time, creating a situation where the new mayor and another council member are showing signs of being opposed to the plan.

"I think both council members have publicly been raising their sincere, legitimate concerns," Fellows said. "They have serious concerns about the negative ramifications of the plan’s passage." This would include its effects on North Las Vegas real estate and other parts of Nevada. 

All in all, it’s expected the plan would create options for 5,000 homeowners, but it would destabilize the real estate situation for 1.97 million Nevada citizens, Fellows suggested.

Realtors continue to battle the plan, viewing it as a complete erosion of property rights.

"Eminent domain is to be used in very specific circumstances for public use – for the benefit of the community, so No. 1, it is a complete erosion of private property rights," Fellows explained.

The other downside is how banks respond. If they perceive risks in the area, an unwillingness to lend could creep in.

Not to mention, Nevada has high standards when it comes to allowing an eminent domain taking. The state constitution requires a party to establish six points before eminent domain can be employed.

The impact of that higher threshold needs to be considered, Fellows added.

But before the city even takes up this issue again, national leaders are laying the groundwork to quash eminent domain proposals altogether.

Rep. Jeb Hensarling, R-Texas, implemented a plan in his housing finance reform legislation to tackle eminent domain rescue plans.

Rep. John Campbell, R-Calif., also introduced the The Defending American Taxpayers from Abusive Government Takings Act — a bill that would prohibit Fannie Mae and Freddie Mac from purchasing any loans that are tied to properties in municipalities using eminent domain in this fashion.

The bill also would prevent the FHA and Department of Agriculture from insuring or making loans in these jurisdictions.

These new bills change the chess board a bit for opponents of eminent domain in North Las Vegas. If the government were to quash the plan as a viable solution first, the city council in August or anytime thereafter is likely to be more hesistant about signing on, Fellows suggested.

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