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NEW YORK (Reuters) - California Lieutenant Governor Gavin Newsom says he wants the U.S. Department of Justice to investigate "threats" against local communities 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, a copy of which was provided to Reuters.
Newsom, a Democrat who was previously mayor of San Francisco, warned the influential Securities Industry and Financial Markets Association in July to "cease making threats to the local officials of San Bernardino County" over the proposed plan to seize underwater mortgages from private investors.
Some towns in San Bernardino County, which is located east of Los Angeles, have set up a joint authority that is looking into the idea of using eminent domain to forcibly purchase distressed mortgages. Rather than evict homeowners through foreclosure, the public-private entity would offer residents new mortgages with reduced debts.
Newsom said in the letter on Monday 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."
SIFMA and other investment trade groups say such use of eminent domain is unconstitutional and could scare away future mortgage financing.
SIFMA officials were not immediately available for 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 already rankled some on Wall Street who invest in mortgage-backed securities and the real estate market.
In his letter, Newsom says a "major" New York-based hedge fund threatened a company that was involved in a municipal program to purchase mortgage loans by using eminent domain. In an email that was copied to 21 other investment firms, the unnamed hedge fund manager wrote: "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; Editing by Lisa Von Ahn