Fed Moves to Help Distressed Homeowners

By: Jeannine Aversa and Alan Zibel
By: Jeannine Aversa and Alan Zibel

WASHINGTON (AP) -- The Federal Reserve is taking steps to keep some distressed borrowers in their homes, but it may not make much of a dent in the nation's housing crisis.

The new relief plan would apply to the billions of dollars of mortgage assets the Fed is holding on its books because of last year's bailouts of Bear Stearns and insurer American International Group. Borrowers have no way of knowing whether their mortgages are held by the Fed, because their loan payments are collected by other companies, known as loan servicers

However, the amount of mortgage securities in question, valued at up to $74 billion, pales in comparison to the $1.75 trillion in outstanding risky loans, according to trade publication Inside Mortgage Finance.

"It's a small step forward," said Jim Carr, chief operating officer of the National Community Reinvestment Coalition, a consumer group in Washington. "If the goal is to stem the foreclosure crisis, this won't do it."

The plan, however, shows that government officials realize they need to buy up mortgages directly, rather than simply urging the mortgage industry to voluntarily assist borrowers, said Guy Cecala, publisher of Inside Mortgage Finance.

"For the government to have any impact on foreclosures and loan workouts, they need to control a lot more," Cecala said. "The best way to do it is to acquire all these bad assets - or even questionable assets - and do it themselves."

Meanwhile, the Fed on Wednesday signaled that it will keep a key interest rate at a record low for quite "some time," and is prepared to buy longer-term Treasury securities. Such a move could help drive down mortgage rates and aid the stricken housing market.

The Fed also said that it stands ready to expand another program aimed at providing relief to the crippled mortgage market.

The central bank is buying up to $500 billion in mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. It also has agreed to buy up to $100 billion of Fannie and Freddie debt. Mortgage rates have fallen in the wake of the program's announcement late last year. The Fed said it could buy more of these securities or extend the length of the program.

The Fed action comes as President Barack Obama's administration has pledged to devote between $50 billion and $100 billion of the second $350 billion in bailout money toward helping people avoid losing their homes.

Under the Fed's new foreclosure prevention effort, homeowners may get a reduced interest rate, longer loan term or a lower total mortgage amount.

Similar steps are being taken by the Federal Deposit Insurance Corp., which took over failed IndyMac bank last summer, and by mortgage finance companies Fannie Mae and Freddie Mac.

In recent years, mortgages were pooled by the thousands into complex securities held by investors worldwide. Many of those investors have been reluctant to agree to drastic loan modifications.

In general, a borrower must be at least 60 days delinquent to qualify for help, although the Fed has leeway to make some exceptions. A 2008 law that set up the $700 billion bailout fund instructed the Fed to take such foreclosure relief action.

"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," Fed Chairman Ben Bernanke wrote in a letter Tuesday to Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee.

Sen. Chris Dodd, D-Conn., chairman of the Senate Banking Committee, welcomed the Fed's program and called it "an important advance."

The Fed's Bear Stearns' portfolio is valued at $27 billion, although the central bank doesn't say how much of that is in home mortgages. The Fed's AIG assets include one portfolio valued at nearly $20 billion of residential mortgage-backed securities and a second portfolio valued at nearly $27 billion of collateralized debt obligations, which are complex financial instruments that combine various slices of debt.

More than 2.3 million homeowners faced foreclosure proceedings last year, a whopping 81 percent increase from 2007. And more than 860,000 properties nationwide were actually repossessed by lenders last year, more than double the 2007 level, according to RealtyTrac, a California-based foreclosure listing firm. Nevada, Florida, Arizona and California had the highest foreclosure rates last year.

Housing, credit and financial crises - the worst since the 1930s- have plunged the country into a recession, now in its second year. So far, a slew of government programs have failed to fix the problems.

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