If the bank agrees, the city and the company then obtain the loan at $150,000. Richmond and the company then offer the homeowner a new loan of $190,000, which, if accepted, lowers the monthly payments and improves the owners' chances of staying.
In such transactions, the company receives $4,500 for each completed sale and splits any additional profits with the city.
If the bank refuses to sell the loan to Richmond, then the city invokes its power of imminent domain and seizes the mortgage. It would then offer the bank a fair market value for the home.
Mortgage Resolution Partners, the company partnering with the city, puts up the money and had promised to pay all Richmond's legal costs. City officials have not said how many homes they hope to refinance through eminent domain.
McLaughlin is a Green Party candidate who beat back opposition from the city's police and fire unions to win a second term in 2010.
She said she fears homeowners will begin to abandon their homes, leading to blighted neighborhoods and the draining of public coffers to the point of municipal bankruptcy experienced by Stockton, Calif., and Detroit.
"The city is stepping in where Wall Street and where the federal government have been unable or unwilling to do so," she said.
Federal regulators said eminent domain isn't the answer. The Federal Housing Finance Agency said plans to seize loans "present a clear threat to the safe and sound operations of Fannie Mae, Freddie Mac and the Federal Home Loan Banks."
Tim Cameron, a Washington, D.C., lobbyist with the Securities Industry and Financial Markets Association, said there is more at play than a single person's underwater loan.
Cameron said pension funds, banks and other groups that made loans in Richmond stand to lose millions if the city is allowed to use eminent domain to force lenders into accepting less than the original terms of the loan.
He also predicted that cities using eminent domain will make lenders wary of doing business there.
"There's a domino effect in play here," he said.