Fed takes major step toward stalling foreclosures

[Mrs. Sharon B. Hodge]

Fed takes major step toward stalling foreclosures
By Alister Bull and Mark Felsenthal

WASHINGTON (Reuters) – The Federal Reserve on Tuesday took a step toward easing mortgage foreclosures threatening millions of Americans, announcing that it would write down troubled mortgages to keep people in their homes.

Fed Chairman Ben Bernanke said the initiative would specifically include $74 billion of assets held in connection with the bailout last year of Bear Stearns and American International Group.

"The goal of the policy is to avoid preventable foreclosures on residential mortgage assets that are held, owned or controlled by a Federal Reserve Bank," he said in a letter to Rep. Barney Frank, chairman of the House of Representatives financial services committee.

The Fed was instructed by the law last year that authorized a $700 billion bank bailout with public money that it must do what it can to minimize foreclosures.

The Bear Stearns and AIG rescues were done outside of this emergency measure, and President Barack Obama has said that part of the second $350 billion tranche of the money, that was released to him by Congress earlier this month, will be used to stem the tide of foreclosures.

Private economists estimate that millions of Americans are at risk of losing their homes after the collapse of the U.S. housing market savaged house prices and forced up unemployment as the economy slid into recession at the end of 2007.

Frank, a Massachusetts Democrat, has been among U.S. lawmakers pressing the Fed and the government to do more to prevent mortgage foreclosures and he said the decision by the Fed was a "major breakthrough."

"We just had very good news from Mr. Bernanke from the Federal Reserve, who has just announced a very significant increase in Federal Reserve policies to reduce foreclosures," Frank told MSNBC television in an interview.

MODIFYING RISKY LOANS

Research firm RealtyTrac says 850,000 foreclosed homes are already on the market and expects this number to rise by another 1 million homes in 2009, with 2 million more homes entering the foreclosure process during the same period.

Senate Banking Committee Chairman Christopher Dodd separately said that the Fed's decision was an important step.

"I am delighted to hear the news. I don't know details of it yet. I am very encouraged by that," he told reporters.

"We have been trying to get, as you know, for some time in the previous administration (of President George W. Bush) for them to take steps on foreclosure mitigation.

"They refused to do so for whatever reason. I am very pleased that the Fed is stepping up," Dodd said.

In a bold effort to unscramble complex mortgage-backed securities at the heart of a financial crisis sparked by the housing market decline, the Fed said it would encourage mortgage servicers to modify loans at risk of default.

It will also "assist" the loan servicer in making modifications, according to a document made public by the Fed on Tuesday, entitled "Homeownership Preservation Policy for Residential Mortgage Assets."

The Fed has said it will purchase up to $500 billion of mortgage-backed securities by the end of June to make home loans more affordable to boost demand for houses.

Mortgage-backed securities pool many different mortgages, which makes them extremely tricky to separate in a loan modification designed to prevent foreclosure.

The Fed said it would consider reducing the interest rate paid on mortgages at risk of default, extending the term of the loan, and accepting "a deferral or reduction of the outstanding principal balance of the loan," according to the Fed document.



(Additional reporting by Rachelle Younglai in Washington and Helen Chernikoff in New York; Editing by Jan Paschal)