By Alejandro Lazo
August 8, 2013, 7:41 p.m.

The nation’s top housing finance regulator threatened to choke off mortgage lending in cities that use eminent domain to seize underwater loans from lenders.

The salvo from the Federal Housing Finance Agency came Thursday, on the heels of a lawsuit directed by major Wall Street firms and U.S.-sponsored mortgage giants Fannie Mae and Freddie Mac against the Bay Area city of Richmond.

Richmond is the first to push forward with the plan, also being debated in cities across the state and nation. Richmond wants to require lenders and investors to sell underwater mortgages at a deep discount. The city would then refinance borrowers into more-affordable mortgages.

The federal housing agency, which regulates Fannie and Freddie, on Thursday made clear it doesn’t intend to let this happen. The agency said it would instruct Fannie and Freddie to “limit, restrict or cease business activities” in any jurisdiction using eminent domain to seize mortgages.

The move would be a “huge blow” to the city of Richmond, said Guy Cecala, publisher of Inside Mortgage Finance.

“It is pretty much a death sentence these days in terms of mortgage financing,” Cecala said. “It is sort of an atom bomb solution, and the real question is would they pull the trigger on it, or is it just a threat? But it is the kind of thing they could do fairly quickly.”

Executives and legal counsel for Fannie Mae and Freddie Mac also singled out the eminent domain plan this week during conference calls with journalists to discuss second-quarter financial results.

To read entire story, click here.