Less than one month into the job, and just one day after his first extensive public comments, Federal Housing Finance Agency Director Mel Watt has a serious problem in the form of Massachusetts Attorney General Martha Coakley.

Coakley directed a letter to Watt urging the FHFA’s director to allow buybacks or face legal action.

“Our office is considering all available legal avenues, including litigation, to ensure compliance with Massachusetts law, should FHFA fail to promptly amend its policies to allow Fannie Mae and Freddie Mac to participate in credible buyback programs,” Coakley says in the letter to Watt.

According to Coakley’s letter, Fannie and Freddie have failed to comply with a Massachusetts law called “An Act to Prevent Unnecessary and Unreasonable Foreclosures.”

The law was passed in August 2012 and “explicitly forbids banks from refusing to consider offers from legitimate buyback programs merely because the property will be resold to the former homeowner.”

One example of a Massachusetts buyback program is Boston Community Capital’s Stabilizing Urban Neighborhoods Initiative. Through this initiative, BCC purchases a home that is typically owned by a lending bank at its current market value and finances its immediate resale to the former homeowner. “Fannie Mae and Freddie Mac have continued to block buybacks even though they lose money in the process,” Coakley says.

“To date, the GSEs have not complied with this provision, which has unfortunately impeded the ability of buyback programs to maximize the number of borrowers they can assist, which in turn has hindered the broader goals of neighborhood stabilization and revitalization,” Coakley says.

Coakley cites the SUN Initiative as an example of buybacks succeeding in keeping homeowners in their homes. “Through this initiative, nearly 500 families in Massachusetts have been able to remain in their homes and have seen their monthly mortgage payments cut to a level that reflects the property’s true market value,” Coakley says.

Coakley’s letter says the SUN Initiative adheres to strict and conservative underwriting standards and provides only 30-year fixed-rate mortgages. “The rate of default on their mortgages is below the national average,” Coakley says. “As a result, financing is extended only to those homeowners who can truly afford to stay in their homes, thus preventing displacement, avoiding the blight of abandoned homes, and stabilizing neighborhoods all in one thoughtful program.”

Coakley says that she is “hopeful that FHFA will “expeditiously amend” its policies in regards to buyback programs or potentially face litigation.

“We believe that buyback programs implemented by credible not-for-profit institutions are key to helping homeowners recover from this foreclosure crisis and restoring a healthy economy,” Coakley says. “The current FHFA policy of prohibiting such sales, even at fair market value, is in direct conflict with the Massachusetts law and represents an economic loss for taxpayer-owned Fannie and Freddie.”

Coakley's full letter, which she also sent to Massachusetts Senators Elizabeth Warren and Edward Markey, Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development and Richard Cordray, director of the Consumer Financial Protection Bureau, can be read here.