FHFA issued a notice Wednesday to warn of the controversial use of eminent domain recently proposed in San Bernardino County.

In San Bernardino County, officials are considering the use of eminent domain to seize underwater mortgages. The mortgages would be taken at fair market value, and then restructured into new loans with terms reflecting the current market. Chicago and Berkeley are also exploring the proposed use of eminent domain.

In the notice, which was sent to the Federal Register, FHFA stated it had “significant concerns about the use of eminent domain to revise existing financial contracts and the alteration of the value of Enterprise or Bank securities holdings.”

FHFA said that in relation to the Fannie Mae and Freddie Mac, the use of an eminent domain program could result in a cost to taxpayers.

FHFA also stated it had significant concerns regarding a “chilling effect on the extension of credit to borrowers seeking to become homeowners and on investors that support the
housing market.”

As conservator for the GSEs and as a regulator for Federal Home Loan Banks, FHFA stated it may need to take action “to avoid a risk to safe and sound operations and to avoid taxpayer expense.”

Along with concerns, the agency also raised several questions, including the constitutionality of the proposed use of eminent domain; the effects on holders of existing securities; and the impact on millions of negotiated and performing mortgage contracts.

FHFA said it is accepting input on topic through its Office of General Counsel no later than September 7, 2012.