Let me put it in simple terms. An idea has been floating around for a while now that, in theory, you could use eminent domain to seize not just the houses, but the mortgages on the houses. Let's say that someone had borrowed $200k, but the house was now worth $100k. If you were a local government, you could seize the mortgage from the mortgage holder paying them compensation of, oh, $80k, tear it up, then the home owner gets a new mortgage for $90k, and gives you the proceeds, which would pay you back for the compensation you had to give the mortgage holder, and leave you with $10k to cover your overheads, fees, court costs, and maybe even leave something over for the group of highly altruistic bankers pushing this scheme.
This is normally where I would say "but there's just one problem", but that would be a lie, because there's at least three.
1) The constitution, post Kelo, is pretty lax about needing a good reason to deploy eminent domain, but it's still quite strict about the compensation needing to be fair (ie, the market value). The market value of a $200k mortgage for a $100k house is NOT $80k, or even $100k. Even if the mortgage is currently in default, it still represents ownership of a house worth $100k; by definition that makes it worth $100k, no $80k...and many mortgages won't default at all; even the ones who will eventually will be making payments in the meantime. So right off the bat, legal analysts are confident it's unconstitutional. (But the city can't offer the actual market value of the loan; they're broke.)
2) Banks are going to be very displeased. Except that's a lie; in the US banks don't actually make mortgages. The Federal government does (more than 90%, in point of fact), through the FHA. And they have already stated that they think this is the worst idea since forever, and they will take whatever steps necessary to shut it down, including just not making any more loans for houses in the region. Which in context is basically the nuclear option; the value of a house which can't get a mortgage is pretty much $0. The scheme absolutely relies on being able to get a new mortgage on the houses.
3) Just as if that wasn't enough, the IRS has a lot of very strict rules involving gifts. And buying someone's loan and tearing it up counts as a gift, and you have to pay tax on it. Quite a lot of tax, as it happens. And the homeowners in question don't have the cash, nor would they be thrilled at their massive tax bills even if they did. Which, again, kills the scheme.
4) It's also not entirely clear that this would be good policy even if it worked. This isn't the first attempt at trying to "fix" the problem of underwater mortgages, but results so far have been mixed at best. Then there's the broader policy implications of a bailout. Once you crunch through the likely results of the program, it's not exactly "take from the banks and give to the poor". The banks don't actually own mortgages, and the poor don't actually own houses. It actually ends up being "take from the pension funds and split the results between the middle class and some bankers". Makes for great soundbites, but it's not exactly Robin Hood and Sherwood Forest here. More like the Sheriff of Nottingham.
TL;DR: The plan is illegal, the federal government has already announced that they're putting a stop to it (and they hold all the cards in the mortgage market), it wouldn't work anyhow, and it's probably bad policy even if it did. It's been called a "scam", and frankly, that's pretty accurate.
Edit: From the article: "He's actually the guy responsible for it all: Steven Gluckstern, a former insurance executive who had teamed up with Vlahoplus to co-found Mortgage Resolution Partners, the firm that's lining up the capital -- from hedge funds, for instance -- to buy any mortgages that Richmond might seize. After that happens, Mortgage Resolution Partners would help the homeowner refinance through a Federal Housing Administration loan, and earns a $4,500 fee per successful transaction." Keep in mind that the FHA has said they won't make the loans. The scheme, at its core, is for some bankers to use hedge fund money to grab assets from pension funds, then refinance it using super-cheap loans from the FHA to turn a quick buck. But the FHA has stated it won't make the loans, so the scheme is D-E-A-D dead.