Towns can be set to any country. You do not have to be a member of the particular country, so you can have towns strategically set as members of different country's, but with your own mayors.
I'm really not sure about the exact rules for castles flipping since it's a fringe thing that rarely happens. Zazmio's castles seem to have reverted to him when he went Free Citizen. So I'm not prepared to put my money on any particular scenario there. Maybe if you change country, any castle with your garrison in it reverts to you, then you have to go there and manually cede it again. That seems probable.
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We do really need to talk about strategy in the North, and what we want to achieve. We can go for short-term gain or longer-term gain. Generally, being greedy is short-term, and will result in being attacked and probably losing all the gains, or worse, giving Staberinde an excuse to take over our cities in that area under the pretext of being the good guys.
Fallon doesn't really have many characters, so he's probably not too serious about his kingdom. So it should be possible with good timing for you guys to take over all the fortresses in a short period of time, and probably all of Fallon's current cities (I'd wait to see if he goes inactive). The question then would be whether it's better to control the region as a proxy country, or incorporate the whole into Slaves to Armok. Personally I think Morlicar could turn his border-holdings Blue, but it might be best to have some sort of proxy-state further West between us and Staberinde. A proxy state would be great cover for nefarious plots.
As for whittling down Staberinde, I think Ehndras could try and eventually tackle one each of StormTrooper's and Kronk's cities. If they only lose one each of very remote cities (such as 73,5 for StormTroopers and 68,39 for Kronk, to an unknown player, they're less likely to try and take them back compared to if you systematically start taking cities from the same player. But I wouldn't recommend setting these cities to Blue for a long time. If they get the idea that we're targeting Staberinde cities to make part of Slaves to Armok, I think we're going to have a lot of problems. Set them to Bloody Baronies for the duration of that kingdom. If and when Bloody Baronies falls apart, then set them whatever you like.