The Federal Housing Finance Agency, or FHFA, the regulator of Fannie Mae and Freddie Mac, said it has "significant concerns" over proposals by local governments to use eminent domain to seize foreclosures and reduce loan balances to provide homeowner relief.

The agency said in a notice that "action may be necessary" in response to eminent domain actions but didn't offer specifics. It said that altering existing contracts could lead to losses at Fannie and Freddie, which hold the majority of U.S. mortgages, and the costs would be passed on to taxpayers. The eminent domain programs could "undermine and have a chilling effect" on home financing as investors become more wary of buying mortgages that could be modified, it added.

The FHFA also questioned the constitutional legality of using eminent domain to seize mortgages, citing consumer protection laws and questioning the role of local governments in valuing securities. The FHFA is accepting feedback on the eminent domain program at the email address eminentdomainOGC@fhfa.gov until Sept. 7.

Supporters of the eminent domain option, including San Francisco-based Mortgage Resolution Partners LLC, have said that the method would cut through lengthy delays and provide effective, targeted relief to homeowners. But the FHFA has been wary of moves that could lead to most costs at Fannie and Freddie, which have cost taxpayers around $180 billion since they were taken over by the federal government in 2008.

Last week, FHFA's acting director, Edward DeMarco, also rejected principal reductions of mortgage balances for homeowners, saying they would lead to additional costs for Fannie and Freddie and possibly encourage borrowers to stop making payments.

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