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The Federal Reserves Ben Bernake sent a letter to the Senate Banking Committee announcing a new loan modification program to help keep struggling homeowners in their homes. The program will be applied to whole owned mortgage assets that it acquired in the recent Fed assisted JPMorgan Chase’s purchase of Bear Stearns and support of insurance giant AIG.
The Bear Stearns portfolio is worth approximately $27 billion and it is not clear how much of the $27 billion is tied to residential mortgages. AIG assets include a $20 billion portfolio of mortgage backed securities (MBS) and a $27 billion portfolio that includes securities that are backed by mortgages.
Bernanke Speaks:
‘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 and that are subject to the policy through sustainable loan modifications and other actions that are consistent with the Federal Reserve’s obligation to maximize the net present value of the assets for the benefit of taxpayers,’ Bernanke wrote.
The new central bank’s new policy may be applied to $84 billion of mortgage assets that the Fed now holds when they bailed out Bear Stearns and AIG in early November of 08.
Loan modifcation details:
* The Fed will call this the “Homeownership Preservation Policy” and it lets the central bank or its agents “promptly” review applicable mortgages to determine whether the borrowers should be offered a loan modification, the document said. Qualified borrowers must be at least 60 days late on their payments.
* Modifications will include cutting the interest rates, extending the loan terms, and deferring or reducing the outstanding principal balance, the Fed said.
“The goal of this policy is to avoid preventable foreclosures on such assets through sustainable loan modifications and other actions that are consistent with the Federal Reserve’s obligation to maximize the net present value of the assets for the benefit of taxpayers,” according to the document.
The plan is required by the Emergency Economic Stimulus Act (EESA) approved last year, and the Fed approved it at a board meeting last Friday. The Fed gave its plan to members of Congress this morning, and Congress is reviewing it today.
Barney Frank:
“It reflects the understandable desire of the Federal Reserve to have some cooperation” with the Obama administration, House Financial Services Committee Chairman Barney Frank told reporters today in Washington.
“This is a very big deal.”
Frank, a Massachusetts Democrat, and other leaders in Congress have criticized the Treasury for failing to act on the foreclosure-relief provisions in the TARP law Congress approved in October. This month, Congress released the remaining $350 billion in rescue funds to the Obama administration.
Christopher Dodd:
“I’m very pleased that the Fed is stepping up,” Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, told reporters today about the Fed’s policy.
With its bailouts of Bear Stearns and American International Group, the Federal Reserve took a vast portfolio of mortgages onto its books. Now, it is trying to use its control of billions of dollars worth of home loans to help prevent foreclosures.
“This is an important advance, and I hope to work with the [Fed] to strengthen the program,” said Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate Banking Committee. Dodd also urged the Fed “to work with consumer advocates to develop the most effective program possible.”
The Fed will distinguish between loans in which the central bank may hold only a fractional int along with other investors, the Fed said. It will encourage the servicers of those residential mortgage-backed securities “to implement a loan-modification program that is consistent with this policy,” according to the document.
