The Federal Housing Finance Agency said Thursday that it would initiate legal action to stop cities from using eminent domain as a way to force the sale of private-label loans at a discount.

The FHFA regulates Fannie Mae, Freddie Mac and the Federal Home Loan Banks that purchased hundreds of billions of dollars in private-label MBS during the subprime boom.

FHFA's statement is designed to stop Richmond, Calif., officials from condemning private-label loans in their community, which could undermine the value of the private label securitities (PLS) held by the GSEs.

The FHFA also indicated it would direct the GSEs to “limit, restrict or cease business activities within the jurisdiction of any state or local authority employing eminent domain to restructure mortgage loan contracts.”

Essentially, the GSEs could redline and stop lending in those jurisdictions.

The GSEs have already suffered billions of dollars in losses on the PLS they hold in portfolio. The banks that created the PLS have been sued by investors, including the GSEs and FHFA, for misrepresenting the quality of the underlying loans.

Due to the servicing contracts, it is difficult for servicers to restructure underwater private-label loans and provide any relief for the borrowers who continue to make their mortgage payments.

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