Fed Will Modify Loans It Holds as Collateral

The Federal Reserve Board said it would modify certain distressed residential mortgages that it inherited when it made loans at the discount window to Bear Stearns and American Insurance Group. It's unclear how many consumers might benefit or what the dollar amount involved might but the Fed is expected to try different methods to help struggling mortgagors, including interest rate and principal reductions, loan term extensions, and payment deferrals. AIG - which is mostly owned by the government - and Bear (now the property of JPMorgan Chase) pledged mortgage-backed securities to the central bank in exchange for discount window loans. Fed chairman Ben Bernanke told Congress that the Fed governors have adopted a policy to help avoid preventable foreclosures based on its authority under the Troubled Asset Relief Program. The Federal Reserve Bank of New York is expected to hire asset managers to handle the workouts.