Mortgage investors trying to block municipalities from using eminent domain to seize underwater mortgages lost a big battle this week.

The city of North Las Vegas entered into an advisory agreement with Mortgage Resolution Partners—a firm that has gained nationwide attention by advising cities on how to deal with troubled borrowers and assets. One of their ideas centers around the principal of local government’s using the power of eminent domain to seize underwater mortgages from investors for the purpose of restructuring them.

The move prompted the Securities Industry and Financial Markets Association, the Association of Mortgage Investors, the Greater Las Vegas Association of Realtors and the Nevada Bankers Association to sound the alarm and call the North Las Vegas agreement disappointing.

“While this agreement does not make it a certainty that the city will use eminent domain, today’s step brings the city closer to embracing an unconstitutional scheme to seize mortgages from people who are paying their monthly payments that will only hurt the broader community,” the industry advocates said.

They added, “In addition to adding unprecedented and unpredictable risk factors into the local housing market and likely cutting off needed credit to the community, the proposal will take money out of the pockets of everyday investors and pension holders and put it in the hands of a small group of private investors backing MRP’s scheme.”

Last week, a number of securitization trades group sounded the alarm when MRP secured contracts with two additional municipalities to form the use of eminent domain programs, including North Las Vegas.

The plan spooked investors in the past, namely when Mortgage Resolutions Partners tried, but failed, to get a similar plan accepted in San Bernardino County, Calif.

The use of eminent domain to restructure mortgages will have a significant impact on mortgage investors since many of the loans are bundled into private mortgage-backed securities.

While SIFMA, along with other coalition partners, appreciate the difficult conditions distressed cities are experiencing, they see eminent domain as a dangerous reform tool with the potential to disrupt local housing markets.

“The decision by a lame duck City Council to enter into an advisory agreement with Mortgage Resolution Partners to survey mortgages for unconstitutional seizure in North Las Vegas is extremely shortsighted and dangerous,” said Tom Deutsch, executive director of the American Securitization Forum.

He added, “MRP is only interested in cherry picking performing mortgages to make substantial profits for itself, while putting the City and its taxpayers in the middle of a constitutional law maelstrom.”

On July 1, the new North Las Vegas city council will take over and the securitization groups are planning to meet up with new members to reconsider the agreement and exercise its right not to proceed.

“If North Las Vegas were to ultimately use eminent domain in this manner, the ability for its citizens to get a first-time mortgage or to refinance will become appreciably harder and more expensive, which would further depress home prices in the area,” Deutsch concluded.

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