Richmond, Calif., is planning to buy residential mortgages in low-income areas for as little as 25 cents on the dollar and may force the sales under eminent domain laws, moving forward with a controversial program that would potentially seize home loans from investors.

Richmond, a city of about 106,500 on the east side of San Francisco Bay, sent letters to 32 servicers and trustees with offers to purchase 624 mortgages whose loan balance exceeds the property value, officials said on a conference call. The loans are the first that the city plans to buy or seize under legal powers unless loan servicers agree to sell, Mayor Gayle McLaughlin said.

“Our community is suffering and we’ll stand together until the damage gets reversed,” McLaughlin said.

Richmond is the farthest along in a plan advocated by Steven Gluckstern’s Mortgage Resolution Partners LLC for U.S. cities to confiscate mortgages and write them down in an effort to help homeowners escape oversized debt burdens. The idea has drawn opposition from bondholders such as Pacific Investment Management Co. and DoubleLine Capital LP and at least 18 trade groups representing the finance industry, homebuilders and real estate firms.

Mortgage Resolution Partners has struck about a “half dozen” advisory agreements with local governments including North Las Vegas, Nevada, Gluckstern said in an interview earlier this month.

Unlikely Sellers

“Both federal and California law clearly show that this scheme is illegal,” said Tom Deutsch, executive director of the American Securitization Forum, a trade organization, said in a statement.

Other opponents, including bondholders, say it would cause unfair losses to investors holding some form of mortgage debt such as pension funds, push lenders to withdraw from markets and expose cities to legal risks.

None of the 32 servicer and bond trustees that oversee the loans are likely to sell willingly, Chris Killian, head of the securitization group for the Securities Industry and Financial Markets Association, Wall Street’s largest lobbying organization, said in a telephone interview.

“You just can’t really sell performing loans out of securitizations,” Killian said. “Additionally, everybody we talk to in the industry thinks this is a bad idea that will be bad for the mortgage markets.”

Risky Terms

Fewer than a third of the loans that Richmond is offering to buy are delinquent. The rest are current on payments yet feature risky terms such as variable interest rates that lured millions of Americans to take on debt as home prices boomed from 2002 to 2006.

Low interest-only payments and negative amortization, where unpaid principal was added to the ballooning balance with interest compounded, are some of the exotic products that have since been abandoned by the mortgage industry after the worst housing collapse since the Great Depression.

Banks have been “unable or unwilling to fix” onerous loans, Amy Schur, executive director of the Los Angeles-based Alliance of Californians for Community Empowerment, said on the conference call. Communities would be better served if local groups help borrowers reduce debt, she said.

“Homeowner groups for years have been trying to get the banks to reduce principal and reset them to current market value,” she said. “Our local strategy is to get the job done, save more homes and save our neighborhoods.”

‘Ill-Advised’

The Richmond program “is a short-term solution for a few underwater borrowers that will have severe negative long-term costs for every homeowner in the city,” David H. Stevens, CEO of the Mortgage Bankers Association, said in a statement.

The city’s proposed action is “ill-advised and likely unconstitutional and will add to Richmond’s problems rather than solve them,” Stevens said.

Richmond’s $195,000 median home price last month, up almost 20 percent from a year earlier, ranked last among the 22 cities tracked in Contra Costa County by research firm DataQuick. The city’s inland location is far from the technology firms in San Francisco and Silicon Valley, where new wealth propelled the nine-county Bay Area median residential value to $555,000 in June, a 33 percent gain, according to San Diego-based DataQuick.

Defaults Rise

New mortgage defaults in Contra Costa County rose 19 percent in the second quarter to 2,214 from the first three months, the highest total of any Bay Area county.

The mortgages Richmond wants to buy would be purchased at prices ranging from 25 percent to 100 percent, said Graham Williams, chief executive officer of Mortgage Resolution Partners.

The Richmond plan may not help homeowners who are already delinquent, said Deutsch of the American Securitization Forum.

“Further, potential homebuyers in Richmond will have to pay more for mortgages to cover the risk of eminent domain or simply not be able to obtain a loan at all,” he said.

Richmond was a ship-building center during World War II. Today Chevron Corp. is the largest employer, with 1,950 refinery workers, data from the city’s most recent financial report show. The 17 percent poverty rate is higher than the California average of 14 percent, and two-thirds of the residents are black or Hispanic, according to the U.S. Census Bureau.