On
the surface it looks like a win-win proposal. The City of North Las
Vegas has seen revenues plummet over the last several years as a result
of the huge rate of foreclosures in the city resulting in lost property
tax revenues. In fact, North Las Vegas very narrowly avoided bankruptcy
last year. At the same time, North Las Vegas homeowners are suffering
under the highest rate of upside down mortgages in Clark County, and one
of the highest in the nation. An unconventional plan appears to propose
a solution to both problems. How does it work? Under the controversial
plan proposed by San Francisco based consulting firm Mortgage Resolution
Partners, the City of North Las Vegas would seize thousands of
underwater homes using eminent domain provisions (the same provisions
used to seize property that lies in the way of interstate expansion,
etc.) The city would then pay the banks (or private investors as MRP
likes to call them) a fraction of the amount owed on the property and
would restructure the debt and resell it to another “private investor”
at a lower principle balance. For this service, both MRP and the City
of North Las Vegas would take a fee as a percentage of the loan amount
for each and every home seized in this manner. The idea is that
homeowners end up with a home loan with a principal balance closer to
the actual current market value of the home, the city makes money, MRP
makes money, and the only loser is those pesky banks we all love to
hate.
What could possibly go wrong? A lot actually.
First,
there is the issue of litigation. Examiners of the bill testified
before city council yesterday and noted that the possibility of
litigation from the private investors who currently own the mortgages in
question is very high. Ward 4 councilman Wade Wagner, the only council
member to vote against the bill, noted “There’s a lot of unanswered
questions. But I think the only thing it (the bill) guarantees is a lot
of litigation for a lot of years.” Second, there’s a small problem with
the potential legality of the plan. Nevada Bankers Association President
Bill Uffelman noted that there are legal limits on the amount of
property the state can seize through eminent domain and then transfer
between private parties. There’s also the matter of selling these
restructured mortgages at the end of the deal. I have to personally
wonder how many banks and other “private investors” will be lining up to
buy mortgage backed securities for mortgages that were non-performing
to begin with and which were seized in a manner that resulted in a huge
loss for the investors who held them originally.
Of course the final issue that no one seems to want to address is the issue of morality. I am as much for saving people’s homes as anyone. In fact, when I first read about this plan my initial reaction was very positive. I thought, “Great! These people will be able to stay in their homes. The government hasn’t been able to help them, the banks won’t modify their loans, this is great for them.” And it is. But at whose expense? Our society has become so comfortable with vilifying “big corporations” and banks as the bad guys that we sometimes neglect to see the forest for the trees. Banks are what drive our economy. Without banks lending money we wouldn’t be able to buy homes, or cars, or pay for college. Without banks lending money the housing industry will very quickly grind to a halt. And yet, we seem perfectly willing to hand over millions of dollars to MRP to help us stick it to the banks whose major crime seems to be that they loaned money to us to begin with. Silly them.
