Freddie Mac's top lawyer threatened to file suit against municipalities that attempt to use eminent domain to refinance underwater mortgages.

"We would consider taking legal action," William McDavid, Freddie's general counsel, said Wednesday on a second- quarter earnings call. "Our sense is that those so-called voluntary loan sales would not be very voluntary. They'd be loan sales under pressure, under a threat of seizure by eminent domain."

The comments were in response to actions taken last week by the city of Richmond, Calif., near San Francisco. The city sent intent letters to 32 trustees and servicers asking to buy roughly 600 underwater loans at reduced prices or face possible seizure through eminent domain.

Fannie Mae, Freddie Mac and the Federal Home Loan Banks are major investors in private-label securities. Though losses from a seizure would be minimal — particularly in comparison to the more than $170 billion in losses so far to taxpayers - there is concern that the use of eminent domain would set a precedent and reduce investor demand for securitized loans.

The Federal Housing Finance Agency, the conservator of Fannie and Freddie, stated publicly last year that the seizure of loans through eminent domain would have a chilling effect on homeowners primarily because investors would balk at purchasing such loans if they could be seized outright by municipalities.

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