Consumer Law

Fed to Write Down Mortgage Balances

By Alan White

Yesterday Chairman Bernanke announced in a letter to Congressman Barney Frank that the Fed will include principal reductions in its plan to modify mortgages that it controls through Maiden Lane LLC, a vehicle set up by the Fed to hold mortgages from Bear Sterns that JP Morgan didn't want.  In particular the Fed foreclosure prevention policy contemplates priority write-downs for mortgages that exceed 125% of current home values.  While the Maiden Lane portfolio (about $27 billion, of which only half are residential mortgages) is a drop in the bucket, the Fed's embrace of principal reduction is a departure even from the FDIC's proactive loan modification program, which prefers deferring principal to actually cancelling it.  Let's hope this design influences the soon-to-be-announced Administration plan to address the foreclosure crisis.

Update:  Wells Fargo's announcement Monday that it will offer streamlined modifications to 478,000 Wachovia borrowers includes a promise to write down principal in areas where home values have declined significantly.  It seems that the dam (holding back principal reductions) is starting to break.

Full post as published by CL&P Blog on January 28, 2009 (boomark / email).