Treasury May Ease Loan-Mods With Guarantees

The Treasury secretary will be able to use loan guarantees and credit enhancements to facilitate loan modifications under the newly passed Emergency Economic Stability Act, which gives the Treasury broad authority to purchase $700 billion of troubled mortgage assets. Such guarantees may give the Treasury a carrot to get institutions to modify their loans without directly acquiring the loans. "It has the ability to create incentives to leverage the private sector with minimal initial cash outlays," said FDIC Chairman Sheila Bair. "I am particularly pleased the bill includes provisions for loan guarantees and credit enhancements on whole loans." The Treasury is expected to conduct its first auction to purchase troubled assets in about four weeks, and it is planning to hire 5-10 asset managers to service and modify the assets, sources say. In addition to private asset managers, the Treasury also can contract with Federal Deposit Insurance Corp. to manage residential mortgages and mortgage-backed securities.