Federal Reserve to Offer Loan Modifications

January 27, 2009 No Comments »

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The Federal Reserve is reportedly set to offer loan modifications on troubled mortgages it acquired via the rescues of Bear Stearns and AIG, using none other than TARP funds.

Bloomberg noted that the Fed’s so-called “Homeownership Preservation Policy” will target borrowers who are 60 days or more behind on their monthly mortgage payments, relying on a portion of the $350 billion in remaining TARP funds recently released to President Obama.

“The goal of this policy is to avoid preventable foreclosures on such assets through sustainable loan modifications and other actions that are consistent with the Federal Reserve’s obligation to maximize the net present value of the assets for the benefit of taxpayers,” according to a document detailing the plan.

That’s good to hear, though I know Bear Stearns was offering 100 percent pay-option arms at the height of the housing boom, so I can’t say I’m optimistic.

The loan modification program will includes a number of approaches similar to those already in place at banks like Indymac, such as mortgage rate cuts, loan term extensions, and deferred or reduced principal balances.

The modifications will be aimed at roughly $75 billion in mortgage securities tied to the two defunct firms, though the central bank may need servicers to play their part as AIG may only hold slices of many of the loans.

The Fed will ask that loan servicers involved with the loans implement a comparable plan to facilitate as many modifications as possible.

It’s unclear who will be handling the review of the many, many loan modification applications to determine eligibility.

(photo: wwarby)

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