By Katya Wachtel
NEW YORK (Reuters) - California Lieutenant Governor Gavin Newsom says he wants the U.S. Department of Justice to investigate "threats" against local communities that are considering using eminent domain to seize and restructure poorly performing mortgages to benefit cash-strapped homeowners.
Newsom sent a letter on Monday to U.S. Attorney General Eric Holder asking federal prosecutors to investigate any attempts by Wall Street investors and government agencies to "boycott" California communities that are considering such moves.
"I am most disturbed by threats leveled by the mortgage industry and some in the federal government who have coercively urged local governments to reject consideration" of eminent domain," he wrote in a letter that was also sent to Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke.
Newsom, a Democrat who was previously mayor of San Francisco, warned the Securities Industry and Financial Markets Association in July to "cease making threats to the local officials of San Bernardino County" over a proposed plan to seize underwater mortgages from private investors.
Some towns in San Bernardino County, due east of Los Angeles, have set up a joint authority that is exploring the use of eminent domain to forcibly purchase distressed mortgages. Rather than evict homeowners through foreclosure, the public-private entity would offer residents new mortgages that would cut the size of the amount owed.
Newsom wrote that while he is not endorsing the use of eminent domain at this time, he wants communities in California to be able to "explore every option" for solving their mortgage burdens "without fear of illegal reprisal by the mortgage industry or federal government agencies."
He argued the mortgage crisis affecting jurisdictions like San Bernardino are local economic problems that require local solutions, and must therefore be managed without "undue" interference from the federal government.
SIFMA and other investment trade groups say such use of eminent domain is unconstitutional and could scare away future mortgage financing.
A spokeswoman for SIFMA declined to comment. A Justice Department spokeswoman did not respond to an email seeking comment.
Governments typically use eminent domain to seize properties to build highways and other public projects. The proposal to use it to help distressed homeowners has rankled some on Wall Street who invest in mortgage-backed securities and the real estate market.
Congresswoman Maxine Waters will host a panel discussion in Washington, D.C. on Tuesday that will examine whether eminent domain offers a feasible way to provide relief to struggling borrowers. Waters has not endorsed the use of eminent domain for principal reduction.
In his letter, Newsom said a New York-based hedge fund threatened via email, a company that was involved in a municipal program to purchase mortgage loans by using eminent domain. He did not name the hedge fund, but noted that the email had been sent to 21 other investment firms.
The letter quoted the unnamed hedge fund manager's email as saying: "This move to pick the pockets of investors in the mortgage market will have far-reaching implications on your business."
(Reporting by Katya Wachtel; Editing by Matthew Goldstein, Lisa Von Ahn and Leslie Gevirtz)