Chicago is the latest city to pass a resolution to hold hearings on whether to use eminent domain to seize underwater mortgages from private investors.

On Wednesday, Chicago's City Council adopted a resolution to explore a plan that would "purchase underwater mortgages out of securitized packages of loans at a steep discount, write them down to fair market value, and then create a new mortgage with a much reduced principal and monthly payment."

The Chicago resolution comes on the heels of a proposal last month by San Bernardino County and the cities of Fontana and Ontario, in California, which created a Joint Powers Authority to explore whether to use eminent domain to buy mortgage loans.

San Bernardino officials are expected to hold a public meeting on Aug. 16 and issue a request for comment on the plan that would use private funds raised by a San Francisco venture capital firm, Mortgage Resolution Partners, to acquire and restructure underwater mortgages. Bondholders have objected to the plan, in part, because the homeowners are not in default and are still paying their mortgage even though they owe more on their loans than their homes are worth.

Chicago's three-page resolution calls for mortgage industry representations to testify at upcoming hearings regarding the implementation of a program "under which the city of Chicago would acquire underwater mortgages through eminent domain."

Such a plan recognizes that "the best way to keep troubled homeowners in their homes is by reducing the principal on their mortgages, thus lowering their debt burdens and more closely aligning their mortgages with the true value of their homes," the resolution states.

The resolution was proposed by Edward M. Burke, an alderman of the 14th ward, and Carrie M. Austin, an alderman of the 34th ward.

Isaac Boltansky, a policy analyst at Compass Point Research & Trading, described the backers of the eminent domain plans as "well-connected, well-funded industry veterans."

Graham Williams, Mortgage Resolution's chief executive, is a former director of residential lending at Bank of America (BAC), while Steven Gluckstern, its chairman, was a "bundler" for President Obama's 2008 campaign, helping facilitate between $200,000 and $500,000 in donations, Boltansky wrote in a recent research report.

Other notable backers of the venture capital firm are Willie Brown Jr., former San Francisco Mayor; Donald Putnam, founder of Putnam Lovell Securities; and Phil Angelides, former California Treasurer and head of the Financial Crisis Inquiry Commission. Angelides served as Mortgage Resolution's executive chairman before stepping down earlier this year, Boltansky says.

Boltansky, for his part, says he doubts plans to seize mortgages through eminent domain will succeed, though he expects more municipalities to announce their intent to do so in coming weeks. City officials in Berkeley, Calif., have requested meetings to examine options to slow foreclosures, he says.

Mortgage experts say only loans held in private-label mortgage-backed securities are being targeted because such investors lack the same degree of legal protections as investors in whole loans and those backed by Fannie and Freddie.

Chicago has tussled with banks and mortgage servicers before.

Last year, Chicago's City Council published an ordinance, backed by Mayor Rahm Emanuel, that required banks, mortgage servicers and institutional investors to maintain vacant properties before the homes had even gone through the foreclosure process.

The ordinance, widely viewed as the most stringent in the nation, required mortgages securitization trustees to assume liability for the maintenance, security, and upkeep of properties in their trusts within 30 days of a property becoming vacant.

The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, filed a lawsuit in December against the city, claiming the vacant property ordinance is unconstitutional. The suit is still pending.

Illinois has the fifth-highest foreclosure rate in the nation and nearly 667,000 Chicago homeowners were underwater on their mortgages as of March, according to Burke.

"Given the size of the foreclosure epidemic in Chicago, the city should explore every possible avenue to keep families in their homes and reduce the number of vacant properties that breed crime and erode the stability of our neighborhoods," Burke, the resolution's co-sponsor, said in a press release.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.