Fed Will Rework Mortgages To Halt Foreclosures

Washington, DC, Jan. 28, 2009--The Federal Reserve will seek to renegotiate mortgages it owns that might otherwise enter foreclosure, Chairman Ben S. Bernanke told congressional leaders in a letter Tuesday.

The decision won praise from congressional Democrats, who took it as a sign that the central bank's leaders are cooperating with efforts to use government power to try to stem the number of foreclosures.

It is unclear how many homeowners stand to benefit. Under the program, the Fed can reduce what a homeowner owes on a mortgage, lower the interest rate, lengthen the term of a loan or take other steps to keep a loan from defaulting, if doing so would offer taxpayers a better long-term payoff than foreclosure.

Individual borrowers are unlikely to know whether their mortgages are owned by the Fed, but if they qualify for a renegotiation, they would deal only with their mortgage servicer.

The Fed is emphasizing reducing the amount of principal owed by people at risk of foreclosure, particularly those with a loan balance that is more than 125 percent of the estimated value of their property. Private lenders have been reluctant to renegotiate loans that way, as some of the institutions that own those loans, in the form of mortgage-backed securities, stand to lose money.

Bernanke has previously advocated principal reductions, saying in a speech in March that they could be an "effective means of avoiding delinquency and foreclosure."

If the Fed strategy works and reduces the number of foreclosures while helping the owner of the loans -- the central bank in this case -- it could serve as a model for other owners of mortgage loans. For example, the Federal Deposit Insurance Corp. has tried to use its control of California bank IndyMac, which it seized last summer, to do loan modifications, but has been frustrated by investors in those loans being unwilling to reduce the amount of principal owed.