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Fed to modify troubled mortgages

The Federal Reserve will look to modify mortgage loans under its control. Separately, Fannie and Freddie will slowly shrink their financing activities.

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By CNNMoney.com staff

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NEW YORK (CNNMoney.com) -- As required by the federal bailout law, the Federal Reserve will look to prevent foreclosures by modifying the terms on certain delinquent loans, lawmakers said Tuesday.

The Fed will seek to adjust delinquent residential mortgages securities it holds, owns or controls, including the assets it took over as part of its rescue of Bear Stearns and American International Group (AIG, Fortune 500). The move doesn't apply to mortgages given as collateral by banks borrowing from the Fed unless the bank defaults on the loans.

"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 Tuesday in a letter to Rep. Barney Frank, D-Mass., head of the Committee on Financial Services.

The policy applies to borrowers who are at least 60 days behind in their payments. Loans may be modified by reducing the interest rate, extending the terms and deferring or reducing the principal balance. Only loans that would have a greater value if modified rather than foreclosed on qualify.

Democratic lawmakers praised the Fed for joining their efforts to assist troubled borrowers.

"I welcome the Federal Reserve Board's decision to finally implement a homeownership preservation program, as we require in the Emergency Economic Stabilization Act," said Senator Chris Dodd, D-Conn, chairman of the Committee on Banking, Housing, and Urban Affairs. "This is an important advance, and I hope to work with the Board to strengthen the program."

Fannie, Freddie rules issued

Separately, the Federal Housing Finance Agency issued interim rules on Fannie Mae and Freddie Mac's portfolios of mortgage assets, as required by the Housing and Economic Recovery Act.

The rules, which mirror those issued by the Treasury Department when it took over the two mortgage finance companies in September, require that Fannie and Freddie shrink their portfolios by 10% a year until they fall to $250 billion each. The finance companies are allowed to hold as much as $850 billion in their portfolios until the end of this year.

Fannie and Freddie have been propping up the housing market after private investors fled when the mortgage crisis hit in 2007. The two firms buy mortgages from lenders and either hold them on their books or bundle them into securities. The companies also buy mortgage-backed securities.

The agency is seeking comment on how to govern Fannie and Freddie's portfolios in the future. In particular, it's asked for feedback on how to handle the benefits and risks associated with them.

Still up in the air, however, is what will happen to the mortgage financing companies. Federal officials must decide whether to make them government entities or return them to the private sector.

Meanwhile, the Federal Housing Finance Agency also issued interim rules defining capital criteria at the 12 Federal Home Loan Banks, which provide low-cost funding to more than 8,000 banks nationwide. A bank's capital level is a measure of how well it can sustain loan losses. To top of page

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