The battle over whether local governments should have the right to seize and restructure troubled mortgages is moving to Capitol Hill. Rep. John Campbell (R., Calif.) is set to introduce legislation on Thursday that would aim to put a stake in the heart of the movement to let cities take over severely underwater loans. Mr. Campbell’s bill, “Defending American Taxpayers from Abusive Government Takings Act,” would use government-controlled mortgage finance giants Fannie Mae FNMA +7.14% and Freddie Mac FMCC +5.88%, as well as the Federal Housing Administration and the Veterans Administration, to block the concept. The eminent domain proposal impacts “private label” loans that aren’t government-guaranteed and were mainly made before the housing bust. But the legislation aims to stop the practice by barring government-linked entities from buying or guaranteeing loans in counties where a local government has used eminent domain to seize a mortgage loan.