(Bloomberg News) More local governments from New York to California are considering plans to seize mortgages to protect their housing markets against homeowners abandoning properties with values below what they owe.

They may be a year too late. Data on the loans municipalities are being advised to target show fewer borrowers with underwater mortgages are defaulting and when they stop paying, modifications increasingly include balance cuts. The number of Americans with negative home equity is also falling as housing recovers from its worst slump since the 1930s, Chris Katopis, head of the Association of Mortgage Investors, said at an Aug. 14 hearing held by a Chicago city council panel.

A group of officials formed to weigh the strategy in San Bernardino County, California, met today for a second time to discuss using eminent domain, whose advocates include Yale University's Robert Shiller and actor John Cusack, who attended the Chicago hearing. They're sparring with bondholders such as Pacific Investment Management Co., banks and real-estate firms.

The declining need for the tactic is "a point we've been trying to make subtly," said Tim Cameron, a managing director at the Securities Industry and Financial Markets Association, Wall Street's largest lobbying group. "The market is coming around and there have been more principal reductions than some would want to believe."

Debt Investors

Cameron, who also spoke at the three-hour Chicago hearing, traveled from New York to join Katopis to argue in San Bernardino against the idea. Opponents are focusing on the potential illegality, effect on new lending and unfairness to debt investors

"The eyes of the nation are on this organization," Mark Dowling, chief executive officer of the Inland Valley Association of Realtors, said today at the hearing held by a so-called Joint Powers Authority created in June by the county and cities of Fontana and Ontario in California.

The entity hasn't studied and shared enough data to evaluate how to help homeowners, Dowling said. County Chief Executive Officer Greg Devereaux, its head, said it will prepare a public request for proposals to protect homeownership and prevent foreclosures. They will seek plans beyond just the use of eminent domain to seize loans, he said.

The document will be evaluated at the authority's next meeting, whose date wasn't scheduled. The entity wasn't set up to solely consider the eminent domain plan being pitched to communities across the U.S. by Mortgage Resolution Partners LLC, Devereaux said at least three times.

Cusack Support

Cusack, the Evanston, Illinois-raised actor who starred in "Say Anything..." and "Grosse Pointe Blank," said in a Aug. 13 video interview with the Huffington Post that the plan addresses the "question of fundamental fairness" for homeowners as federal officials fail to act aggressively enough, and would "help reset the markets."

The program touted by San Francisco-based Mortgage Resolution Partners, which is seeking to profit from managing parts of the process, would target loans held by bonds without government backing.

Its proposal involves governments forcefully buying non-delinquent mortgages for less than what borrowers owe. Homeowners could then get their loans refinanced into smaller, federally-backed ones. Using eminent domain is justified because stabilizing housing and reducing vacant properties is in the public interest, and bondholders would receive cash deemed to be the fair value of their loans, the firm says.

Breaking Contracts

"It might have been the reasonable thing to do in the teeth of the crisis," said Mark Zandi, the chief economist at Moody's Analytics Inc. who this week advocated with Nobel Laureate Joseph Stiglitz for federal legislation to aid underwater homeowners. "The risks are much less significant today," meaning policy makers should avoid "breaking contracts" and potentially damaging lending, he said.

In San Bernardino, 14,378 loans might have qualified for such a program in June 2011 by being at least 15 percent underwater, current and packaged into so-called non-agency mortgage bonds, according to a July 31 report by Royal Bank of Scotland Group Plc.

As of this June, 81 percent of those were still being paid on time, according to RBS analysts Scott Gimpel, Charles Shuey III and Daniel O'Connor. For loans that would have qualified in 2010, only 78 percent were current after 12 months, compared with 69 percent for loans in 2009 and 49 percent in 2008. The trend was similar in other areas considering the idea, such as Chicago and Suffolk County, New York, they wrote.

First Defaults

The share of all loans in non-agency securities that defaulted for the first time dropped to a 7.5 percent annual pace in July, according to Amherst Securities Group LP data. The rate, which peaked at more than 25 percent in 2009, declined from 9.5 percent a year earlier, as unemployment fell and borrowers lived in their homes for longer.

Underwater homeowners remain a threat to housing, including those who continue to pay, according to Mortgage Resolution Partners President Steven Gluckstern, a former senior insurance executive including at the reinsurance operations at Warren Buffett's Berkshire Hathaway Inc.

"Eventually, they all stop," Gluckstern, also an initial member of the national finance committee for President Barack Obama's 2008 election, said Aug. 10 on Bloomberg Radio. "There will be no recovery until this problem has been addressed."

Bank Settlement

Homeowners who default may be growing more likely to receive principal reductions after a February settlement of federal and state probes into shoddy foreclosure practices by five large mortgage servicers, according to an Aug. 10 report by Barclays Plc. The $25 billion accord offers the banks credit for reworking debt, including loans in bonds owned by others, with a greater amount granted for lowering balances.

The trend among subprime loans has been most dramatic among modifications of those in securities issued from 2005 through 2007 by Countrywide Financial Corp. and still serviced by Bank of America Corp., according to Barclays analysts including Dennis Lee and Sandeep Bordia. Bank of America bought the lender in 2008 and oversees 27 percent of all non-agency mortgages.

In July, debt forgiveness was applied about 55 percent of the time when those loans were reworked, up from less than 30 percent during 2010 and 2011, according to their data. Wells Fargo & Co. used principal forgiveness in 67 percent of non- agency modifications last month, while JPMorgan Chase & Co., applied it 71 percent of the time, the analysts said, with both increasing the rate.

Underwater Borrowers

Federal incentives for balance cuts also rose this year under Obama's Home Affordable Modification Program. New HAMP trials fell to 16,300 in July, the lowest since the program's start in 2009, according to Barclays.

The number of underwater homeowners has dropped after some borrowers lost properties and housing stabilized. The total fell to 11.4 million, or 23.7 percent of those with mortgages, in the first quarter, from 12.1 million in the previous period, according to real-estate data firm CoreLogic Inc.

Property prices, which almost doubled from 2000 through their July 2006 peak, then declined 35 percent through February, according to an S&P/Case Shiller index. The measure of values in 20 large U.S. metropolitan areas gained 3.6 percent through May.

Values in the San Bernardino-Riverside area, east of Los Angeles, were 47 percent below their June 2006 peak as of May, after gaining 1.5 percent from a year earlier, according to Lender Processing Services data. About half of San Bernardino mortgage borrowers are underwater, according to Devereaux.

Bondholder Opposition

Money managers AllianceBernstein LP and Western Asset Management Co. and groups that lobby for banks including the Housing Policy Council and real-estate firms such as the National Association of Home Builders say seizing loans isn't an appropriate response. Scott Simon, the mortgage head at Pimco, which runs the world's largest bond fund, has said it would be a "nail in the coffin" for the private mortgage market.

Chicago Mayor Rahm Emanuel, the former chief of staff to Obama, also said Aug. 14 that he doesn't "think it's the right way to address the problem," the Chicago Tribune reported.

Shiller, the Yale economics professor who warned of a housing bubble in the 2005 edition of his book "Irrational Exuberance," has supported the idea. He wrote in a June 23 op- ed in the New York Times that "we have to stop the wishful thinking that the problem will solve itself through a spontaneous rally in home prices."

'Back Off'

California Lieutenant Governor Gavin Newsom said in a July 27 statement that industry groups should "back off" while the concept is examined.

Zandi of Moody's said in a telephone interview that "we're clearly moving in the right direction but the risks of things going south are uncomfortably high" with the economy fragile.

That's why in a Aug. 12 New York Times op-ed he joined with Stiglitz to back a bill to refinance underwater non-agency loans into a new government-financed trust that would lower borrowers' payments or shorten their terms, Zandi said. At the Chicago hearing, Katopis of mortgage-investor group also supported that idea, which would repay bondholders in full for loans.

Et Snell, who describes himself as a community activist, said at the hearing today that the eminent domain idea represents a "band aid over a bullet hole," and would take too long to implement because of lawsuits. In the meantime, county officials are doing nothing to help residents in foreclosure living without utilities like electricity, he said.

"Time is of the essence to come up with something," Snell said. "Instead of shaking down the mortgage companies, we need to sit down and put our heads together and solve this whole mess."