Housing regulator airs 'concerns' about novel housing relief plan

The housing regulator overseeing Fannie Mae and Freddie Mac threw cold water on an idea brewing in local governments to boost the housing governments by seizing underwater mortgages via the power of eminent domain.

In a notice issued Wednesday, the Federal Housing Finance Agency (FHFA) said it had "significant concerns" about the new strategy, and said it would consider taking action to block such efforts. The regulator warned that such projects could result in a cost to taxpayers, while negatively affecting borrowers seeking new credit and investors in the housing market.

The FHFA did not detail what lengths it would go to to block local efforts to seize mortgages in an attempt to help struggling homeowners, but its coming out against the fledgling idea could squash it before it gains substantial traction.

San Bernardino County in California has proposed using its eminent domain powers to seize distressed mortgages at a steep discount, which would then be refinanced to make them more affordable for struggling homeowners.

The idea had begun to attract attention across the country, as well as on Capitol Hill.

When he testified before the House Financial Services Committee in July, Treasury Secretary Timothy Geithner said his department was "carefully looking" at the proposal when asked about it by Rep. Gregory Meeks (D-N.Y.).

However, he cautioned that the idea "raises a lot of complicated legal and policy questions," and added that states have a "broad range of other tools" available to assist struggling homeowners.

The move had earned the ire of the financial sector, which was buoyed by the concerns aired by the FHFA.

"Such actions would have a wide variety of negative impacts on the fragile housing recovery and in particular on the consumers in the jurisdictions that employed such a method," said John Dalton, president of the Housing Policy Council for the Financial Services Roundtable. "It would ultimately make it harder for deserving consumers to obtain credit."

The Securities Industry and Financial Markets Association warned regulators in July that they believed such an approach would be unconstitutional and would have "devastating consequences" to the private housing market.

The FHFA's notice came just days after its acting director, Edward DeMarco, announced the regulator would not permit a plan pushed by congressional Democrats and the White House that would write down the principal on mortgages for struggling homeowners.

DeMarco said the proposal, which had been a high priority for many Democrats, yielded too small a benefit and posed "unknown costs and risks."

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