Richmond, Calif., took a step toward setting up a mortgage principal reduction program to help homeowners with troubled loans, while leaving the door open to using its eminent domain powers to acquire the debt.

The city council refused to shelve a plan to seize mortgages that exceed the value of their properties, which has spurred lawsuits by U.S. banks including Wells Fargo & Co. The council agreed that any effort to acquire loans through eminent domain—the right of governments to take private property for the public good—would require their approval.

“Our residents have been badly harmed by this housing crisis,” Mayor Gayle McLaughlin said. “The banks have been unwilling or unable to fix this situation, so the city is stepping in to provide a fix.”

Richmond is among U.S. cities considering the proposal advocated by Steven Gluckstern’s Mortgage Resolution Partners LLC to seize and refinance so-called underwater mortgages to avert foreclosures.

San Francisco-based 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.

Richmond sent letters in July to 32 servicers and trustees with offers to buy 624 mortgages, saying it was “experiencing a historic home mortgage crisis” that’s harming the community.

Council member Nathaniel Bates opposed the plan and offered a proposal to withdraw the offers.

“We cannot fight with Wall Street and their big monies,” he said. “Richmond may be a test case where the lending institutions will take this thing to the furthest limit.”

Mortgage-bond trustees Wells Fargo, Deutsche Bank AG and Bank of New York Mellon Corp. last month sued the city, saying its plan violates constitutional protections against impairing private contracts. Wells Fargo and Deutsche Bank represent investors including BlackRock Inc. and Pacific Investment Management Co.

Wells Fargo “does not have the contractual authority to sell the loans and is not aware of any other party having the contractual authority to sell the loans or consider your offer,” David Gorsche, the bank’s assistant general counsel, wrote in an Aug. 13 response to the city’s offer to buy the mortgages.

Richmond’s 17% poverty rate is higher than the California average of 14%, and two-thirds of the residents are black or Hispanic, according to the U.S. Census Bureau.

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