Three California local governments may use their eminent domain powers to seize mortgages and restructure them to help distressed borrowers stay in their homes — much to the dismay of investors who hold the mortgages.

Eighteen trade groups, including the American Bankers Association, the Securities Industry and Financial Markets Association and the Housing Policy Council of the Financial Services Roundtable, have called into question the legality of a plan proposed by a venture capital firm and being considered by three California municipalities. The program would allow the governments to use their eminent domain powers to seize loans held in private-label mortgage-backed securities.

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