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Originally published September 11, 2013 at 7:17 PM | Page modified September 12, 2013 at 3:34 PM

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Calif. city plans to use eminent domain to seize underwater mortgages

The Richmond, Calif., City Council voted 4-3 to set up a joint powers authority to use eminent domain to seize so-called underwater mortgages.

The Associated Press and Bloomberg News

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RICHMOND, Calif. — A San Francisco Bay Area city voted Wednesday to try to expand a first-in-the-nation plan to use its power of eminent domain to seize hundreds of mortgages that exceed the value of homes.

The Richmond City Council voted 4-3 to set up a joint powers authority to bring more cities into the plan, according to reports in local media.

Mayor Gayle McLaughlin says the city of El Monte in Southern California has expressed interest, and she believes other cities will follow.

Under the plan, Richmond would use eminent domain to seize so-called underwater mortgages. It would offer the bank fair-market value for it and give the homeowner a new loan that would lower monthly payments and improve the owner’s chances of staying.

Banks have filed lawsuits to stop Richmond from going ahead with the strategy, and investors have shied away from purchasing city bonds since the eminent-domain plan began garnering national attention.

More than 200 speakers jammed City Hall to debate the plan, delaying the vote until after 1 a.m. Wednesday.

Critics fear the city will lose its legal battle with the banks and face millions of dollars in damages if it adopts the unprecedented plan to forcefully take mortgages from financial institutions and pay them far less than is owed.

The city faces an uphill battle to implement the plan. It would take votes from five council members to grant the city the eminent powers it needs to seize the loans. Supporters mustered only four votes for the action on Wednesday.

However, the council also voted 5-2 to reject a proposal to kill the plan altogether.

“Waiting for the next wave of foreclosures is the real risk,” said McLaughlin, an outspoken proponent of the plan. “It’s time for us to take a stand.”

Richmond, a refinery town of about 106,000 east of San Francisco, is among U.S. cities considering the proposal advocated by Steven Gluckstern’s Mortgage Resolution Partners to seize and refinance so-called underwater mortgages to avert foreclosures. Mortgage Resolution Partners would provide services and arrange for private investment funds that would profit by buying the loans for less than property values.

While Mortgage Resolution Partners is shopping around the plan to several communities, “Right now, we are the only one” to support it, City Manager William Lindsay told the council. Lawmakers in North Las Vegas, Nev., last week rejected a similar plan.

A federal judge in San Francisco will scrutinize the plan Thursday and hear arguments from lawyers representing bondholders who sued the city through their bank trustees for a court order to halt Richmond from moving ahead. Richmond and Mortgage Resolution Partners oppose the request and will ask U.S. District Judge Charles Breyer to dismiss the case because the city council has yet to vote on whether to acquire loans through eminent domain.

Breyer could decide Thursday whether to grant an injunction, or issue a ruling at a later date.

About 38 percent of Richmond homeowners with a mortgage, or more than 7,000, are underwater, according to data provider RealtyTrac.

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