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The Federal Housing Finance Agency said Thursday that it stands ready to challenge or cut off states or local areas that attempt to invoke eminent domain to restructure mortgage loans.

FHFA said this use of eminent domain "presents a clear threat to the safe and sound operations of Fannie Mae, Freddie Mac and the Federal Home Loan Banks . . . (and) runs contrary to the goals set forth by Congress for the operation of the conservatorships by FHFA."

FHFA said it may exercise any of its following statutory authorities in response to eminent domain action to restructure mortgage loans:

• initiate legal challenges to any local or state action that sanctions the use of eminent domain to restructure mortgage loan contracts that affect FHFA's regulated entities;
• act by order or by regulation to direct the regulated entities to limit, restrict or cease business activities within the jurisdiction of any state or local authority employing eminent domain to restructure mortgage loan contracts; or
• take such other actions as may be appropriate to respond to market uncertainty or increased costs created by any movement to put in place such programs.

NAFCU wrote the housing finance regulator last year warning of the dire consequences that this use of eminent domain could have on lenders, investors in mortgage securities and on the availability of mortgage credit. The association has also put its support behind legislation in the House that would bar the restructuring of loans seized under eminent domain through the Federal Housing Administration.

The city of Richmond, Calif., has contracted with a firm and is seeking to buy 624 mortgage loans from lenders for modifications, Bloomberg reported. Borrowers are current on these loans, but their homes' market value has declined to less than the outstanding loan amounts. The investment management firms PIMCO and BlackRock Inc. are reportedly getting ready to sue to stop the action.