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Richmond Mayor Gayle McLaughlin and supporters visit Wells Fargo headquarters in San Francisco Thursday to demand the bank drop legal action against the city on behalf of investors to block the city's plan to use eminent domain to seize underwater mortgages. (Robert Rogers/Staff)

RICHMOND -- With legal and financial challenges mounting , momentum is building to scuttle the city's radical plan to use eminent domain to seize underwater mortgages and refinance them at amounts homeowners can afford.

New concerns have arisen in recent days that Richmond may not be able to refinance its municipal bonds or secure insurance protection in the event of a major loss in court stemming from the eminent domain plan.

Foes of the plan have pounced, and supporters are cautious.

"This (City Council) needs to fish or cut bait and abandon this eminent domain madness," Councilman Nat Bates said in an email to supporters Aug. 21. "The stakes are too high and costly to fight Wall Street and the financial institutions."

Bates said he plans to move at the City Council's Sept. 10 meeting to withdraw the city's offers to purchase the underwater mortgages.

"This has caused serious financial risk to the city," Bates said.

In August, Wells Fargo and Deutsche Bank filed suit on behalf of investors for a preliminary injunction against Richmond and Mortgage Resolution Partners (MRP), the San Francisco-based investment firm that the city has partnered with to implement the plan. A hearing is scheduled for Sept. 13.

Perhaps more troubling, investors this month steered clear of the city's highly rated municipal bonds, which it was attempting to sell to refinance a bond issue, saving $4 million. Some think the lack of investor interest was precipitated by the eminent domain decision. The city's finances are already reeling, thanks to steep reductions in property tax revenues.

Councilman Jael Myrick, an initial supporter of the effort to use eminent domain, said he needs "all the facts."

"Is our bond rating really at risk? How well are we protected?" Myrick said. "I need to know, but I still believe the program has tremendous value if we can find a way to make it work."

In an email to the City Council this week, City Manager Bill Lindsay wrote that it is "impossible to know why investors were not willing to bid on the bonds because they did not inform us as to their reasons."

Lindsay, who brought MRP to the city and has been solidly behind the approach, sounded a note of caution.

"Nonetheless, the possibility that the mortgage-acquisition program may impair Richmond's ability to access the credit markets is a very real concern, of which the Council should be aware," Lindsay wrote.

In an Aug. 17 email from a city debt analyst to Richmond Finance Director James Goins, the analyst noted that bonds expected to draw investors had been snubbed.

"Various reasons were given by the investors as to why the bonds were not being purchased, from concerns about credit to concerns about the city's liquidity," the email read.

Meanwhile, City Council members have questioned whether Lindsay overstepped council directives when he sent letters in July threatening to use eminent domain to seize 624 underwater mortgages if lenders didn't agree to sell the city the loans by Aug. 14. Bates said the council approval on April 2 to enter into a contract with MRP did not authorize Lindsay to send the letter.

Lindsay's letter offered to buy mortgages at current appraised values, some of which are less than half the amount of the mortgage, minus about 20 percent for transaction costs. No one accepted the offer.

Five of seven council members would need to approve the use of eminent domain before the city could move ahead with seizing mortgages. Asked Friday when the council may vote to move ahead with seizures, Lindsay said in an email, "There may never be a vote on whether to move forward on eminent domain, so it is impossible to answer when."

Mayor Gayle McLaughlin, who on Aug. 15 led more than 40 protesters to the Wells Fargo corporate headquarters in San Francisco in response to the banking giant's lawsuit against the city, and MRP officials did not immediately respond to inquiries seeking comment Friday.

Grass-roots activists, who have pushed hard for the eminent domain scheme, remain undaunted.

"The state Attorney General and the Department of Justice need to investigate potential antitrust violations and ensure that Wall Street banks aren't illegally discriminating against Richmond," said Amy Schur, campaign director for Alliance of Californians for Community Empowerment (ACCE).

Although MRP has agreed to pay all legal expenses incurred by the city in defending legal challenges to eminent domain seizures, concerns have surfaced that the city may be exposed to significant risk if a court rules against it.

Lindsay said Friday that the city's contract with MRP requires that it indemnify the city for claims stemming from eminent domain proceedings but added that there was not yet proof that it could protect the city.

In an email exchange Thursday, city Risk Manager Kim Greer also said MRP did not have insurance to cover the city against potential damages.

"Once the (eminent domain) activities hit the newspapers, no carrier would even consider them," Greer wrote.

City Attorney Bruce Goodmiller, in the same email thread, said he is not concerned now because "the city has only sent a letter, nothing more."

"I believe everyone involved, including MRP, is convinced that we cannot rely on MRP's insurance to cover any damage award in an eminent domain lawsuit against us," Goodmiller wrote.

Contact Robert Rogers at 510-262-2726 or rrogers@bayareanewsgroup.com. Follow him at Twitter.com/roberthrogers.