By Jennifer Ablan and Matthew Goldstein

(Reuters) - California Lieutenant Governor Gavin Newsom on Friday warned influential investor group Securities Industry and Financial Markets Association to "cease making threats to the local officials of San Bernardino County" over a plan to use eminent domain to seize underwater mortgages from private investors.

San Bernardino County, located east of Los Angeles, and some of its towns have set up a joint authority that would use the power of eminent domain to forcibly purchase distressed mortgages. Rather than evict homeowners through foreclosure, the public-private entity would offer residents fresh mortgages with reduced debts.

"Communities have been ravaged by the housing crisis and the financial sector has had long enough to fix the problem they helped create," Newsom said in a statement first released to Reuters. "We cannot let another day go by while families are forced from their homes. We must think big and help our local governments develop solutions - because the industry and federal government have not."

"This may be an aggressive idea, but communities such as San Bernardino, Chicago and others have no choice in these desperate times," said Newsom, a Democrat who was previously mayor of San Francisco.

On Wednesday, Chicago became the latest government -following San Bernardino County and Berkeley, California - to pass a resolution to hold hearings on whether to use eminent domain.

The novel plan to use eminent domain, developed by San Francisco-based Mortgage Resolution Partners, has raised the hackles of many on Wall Street, especially investors in mortgage-backed securities and the real estate business.

Traditionally, eminent domain is used by governments to seize properties to build highways and other public projects.

The Securities Industry and Financial Markets Association, known as SIFMA, and other investment trade groups, has previously warned that the proposed use of eminent domain could prove counterproductive by scaring away future mortgage financing.

A spokesman for SIFMA was not immediately available to comment on Newsom's statement.

Tom Deutsche, executive director of American Securitization Forum, commenting before Newsom issued his statement, said his trade group is carefully monitoring the proposals on using eminent domain, which his group opposes. He said the issue would end up in litigation if any county or municipality tried to seize mortgages through eminent domain.

Litigation could set off a long court battle to determine the legality of seizing mortgages as opposed to the physical homes.

(Reporting By Jennifer Ablan and Matthew Goldstein; Editing by Bernard Orr and Leslie Adler)