Fed Starting Workouts For Delinquent Borrowers

Washington-The New York Federal Reserve Bank is holding billions of dollars of residential mortgage assets from Bear Stearns and American International Group and the Federal Reserve Board has finally decided to start workouts and modifications for those delinquent borrowers.

Congress granted the Federal Reserve Board this modification power back in October as part of the first Troubled Asset Relief Program bill.

Fed chairman Ben Bernanke informed Congress last week that the board has adopted a foreclosure prevention policy and is planning to begin loan modifications.

"The Fed is exercising its authority under the original TARP to deal with mortgages," chairman Barney Frank, D-Mass., said at a House Financial Services Committee meeting last week.

In a letter to Rep. Frank, the Federal Reserve Board chief said the board has decided to apply the new policy to residential mortgage assets it holds as collateral for propping up AIG and facilitating the acquisition of Bear Stearns by JPMorgan Chase.

The Fed holds the mortgages as collateral for discount window loans. The Fed's loan modification policy could be applied to future bailouts.

The New York Federal Reserve Bank is expected to hire asset managers to handle the workouts, which can include interest rate reductions, loan term extensions, as well as deferrals or reductions of the principal amount of the loan.

Meanwhile, Chairman Frank wants to revamp the Hope for Homeowners program and make the Federal Housing Administration refinancing program attractive to borrowers and servicers.

So far the Hope program has been a flop. But the Obama administration wants an enhanced FHA refinancing program as part of its comprehensive approach to foreclosure prevention.

Chairman Frank has scheduled a committee markup for this week and he plans to attach the Hope bill (H.R. 703) to a major appropriations bill Congress is slated to pass right after the massive economic stimulus bill.

An earlier version of the Hope bill included provisions to eliminate the 3% upfront insurance premium, cut the 1.5% annual premium in half, and drops a shared appreciation approach that entitled the government to 50% of any price increase when the house is sold.

For servicers, the bill ensures they will receive a fee for refinancing underwater mortgages and eliminates liability for a first payment default.

H.R. 703 also includes Federal Deposit Insurance Corp. provisions to permanently increase deposit insurance coverage to $250,000 and increase the FDIC's borrowing authority.

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