Fed: Buy Bad Mortgages To Restructure Them

The vice chairman of the Federal Reserve said Tuesday that the Treasury Department should consider buying troubled mortgages from financial institutions as both a way to prevent foreclosures and help banks clean up their balance sheets. In testimony before the House Financial Services Committee, Fed vice chairman Donald Kohn noted that the presence of "hard-to-value" assets (including subprime ABS) at depositories is making it difficult for banks to find new investors and raise private capital. The original intent of the $700 billion Troubled Asset Relief Program was to buy underwater mortgages and MBS from financial institutions but was shelved by Treasury secretary Henry Paulson in favor of making preferred stock investments in banks. John Bovenzi, the Federal Deposit Insurance Corporation's chief operating officer, told the committee that removing problem assets (presumably mortgages) from the balance sheets of financial institutions "continues to be vitally important."