Turning PISTOL on its head

New eminent domain plan would abrogate property rights of mortgage lenders

It began with Susette Kelo, but it could have just as easily begun with Carol Pappas or a host of other Nevadans.

In 1997, after years of scrimping and saving, Kelo was able to purchase and renovate her dream home in New London, Connecticut — a little pink house overlooking the water where the Thames River meets the Long Island Sound. But the next year, city officials seized Kelo’s dream home through eminent domain in order to turn the land over to a private developer who had promised the city council that the land would generate more property tax revenue as a commercial development than as the site of Kelo’s dream home.

Kelo contested the taking on the grounds that the motivation did not constitute a legitimate “public use,” as required by the Fifth Amendment of the U.S. Constitution. The case finally reached the U.S. Supreme Court in 2005, when the Court delivered one of the most controversial decisions in its history: It concluded that “economic development” constitutes a legitimate “public use” and, therefore, this type of collusion between local officials and well-connected private interests is constitutional.

Similar cases had arisen in Nevada. Carol Pappas, a 65-year-old immigrant store owner in downtown Las Vegas had her property seized by the City of Las Vegas in 1994 so it could be instantly transferred to another private owner. After the Pappas family contested the taking, the Nevada Supreme Court declared, in 2003, that the taking constituted a legitimate public purpose using the same reasoning as that applied in the Kelo case.

Developers liked using local authorities’ eminent domain powers because it often allowed them to acquire property at discount rates. As in the Pappas case, city officials would frequently lowball owners on the value of their property and pressure them to accept the lowball offer under threat of eminent domain. Former Las Vegas mayor Jan Jones, for instance, lowballed the Pappas family and then said, “Take our offer, or we will use eminent domain.”

Since few families have the financial resources to challenge local governments — which have access to vast taxpayer resources — in court, many felt compelled to accept the lowball offers.

The legal precedents handed down by state and federal high courts alarmed property owners across Nevada and the nation as they became aware that their property could be seized at any time if a private developer wanted to build a strip mall or other development on the site. As a result, residents of Nevada and several other states began working to amend their state constitutions to declare Kelo-type eminent domain takings impermissible.

In 2006 and 2008, Nevada voters overwhelmingly supported the People’s Initiative to Stop the Taking of Our Land (PISTOL) that inserted into the state’s constitution provisions clarifying that “public use shall not include the direct or indirect transfer of any interest in property taken in an eminent domain proceeding from one private party to another private party.” Related provisions also prohibit state and local governments from charging property owners for legal fees if owners decide to fight back against eminent domain takings.

Now, however, a new plan being considered by the North Las Vegas City Council would turn PISTOL on its head by allowing the city to initiate eminent domain proceedings against underwater homes in order to transfer those homes to a private firm. The firm, Mortgage Resolution Partners, would then supposedly refinance the homes and sell them back to their original owners at a lower principal.

Mortgage Resolution Partners spokesman Byron Georgiou gave the Las Vegas Sun this example:  The city would use his firm’s money and its eminent domain powers to seize from investors a $300,000 outstanding mortgage on a house that currently has a market value of only $200,000. The city would force the trust representing the investors to sell the mortgage at a below-market-value price, so that Georgiou’s firm could acquire the home for $150,000. He and his partners would then be able to sell the home back to the original owner for $190,000 and split the $40,000 difference between themselves and the city council.

In his estimation, “You save money for everybody.”

It may well be true that city council members and corporate cronies like Georgiou would benefit by stealing value away from city investors and residents, but it’s unclear how anyone else might benefit. First, once title has been transferred to Georgiou’s firm, it would have no obligation to sell the property back to the original owners. If Georgiou’s firm is to own the title free and clear, it can dispose of the property as it wishes. This uncertainty would give little solace to any homeowner whose house is taken by the city and delivered to Georgiou and his partners.

Second, even if Georgiou’s firm delivers on its promise to sell the homes back to their original owners, an important party will have suffered substantial and unambiguous losses from this unjust scheme — the mortgage investors who made the homes’ original financing possible. Ownership over a mortgage note is an important property right that investors receive when they agree to lend money to borrowers. Without this legal claim, investors would almost never be willing to lend to prospective homeowners and home ownership would only be accessible to those who are able to purchase a home using cash.

As Nevada Bankers Association president Bill Uffelman says, “If I was writing mortgages that somebody could take away from me at some point in the future, I’d be very concerned.”

Yet, that’s exactly what’s being considered by the North Las Vegas City Council. Not only would the council take away mortgages from their owners and transfer them to Georgiou’s firm, it would explicitly do so without rendering fair value.

PISTOL exists to offer constitutional protection against exactly this type of collusive thievery amongst politicians and private interests. Not only is the transfer of property from one private party to another using eminent domain power prohibited, but the law also requires that any taken property “be valued at its highest and best use,” with “just compensation” delivered to the property’s owner so that the owner is “back in the same position, monetarily … as if the property had never been taken.”

If North Las Vegas, or any other Nevada jurisdiction, decides to move ahead with this plan, it will clearly run afoul of the Nevada constitution, damage its local home-mortgage market and become known nationally for its scam.

That’s far too high a price, just to enrich cronies.

Geoffrey Lawrence is deputy policy director at the Nevada Policy Research Institute. For more visit http://npri.org.