The Wall Street Journal first reported that big banks and mortgage bond investment groups were joining forces in a lawsuit against eminent domain plans in the city of Richmond, Calif. The city is working with Mortgage Resolution Partners to implement the controversial plan.

On an earnings call this morning, Fannie Mae CEO Timothy Mayopoulos said the government-sponsored enterprise was also among the plaintiffs. Freddie Mac is also in, and is exploring other options as well.

According to the article:

"The lawsuit alleges that the proposed use of eminent domain is unconstitutional because it benefits a small group of Richmond citizens at the expense of out-of-state investors, violating the law on interstate commerce," writes author Nick Timiraos. "The lawsuit also argues that loans aren't being seized for a valid public purpose—a key criterion for a city that invokes eminent domain."

In a statement to press, John Ertman, a partner at Ropes & Gray, the lawfirm which filed on behalf of the group of institutional investors said: “Mortgage Resolution Partners is threatening to seriously harm average Americans, including public pension members, other retirees and individual savers through a brazen scheme to abuse government powers for its own profit.”

"This unconstitutional application of eminent domain will be devastating for mortgage finance both public and private.  It will completely undermine the willingness for private capital to return to the mortgage markets," he added.