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.

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