In a letter to Congress, Federal Reserve Chairman Ben S. Bernanke said the Fed will begin modifying loans that back securities it has taken on in recent months, including those associated with the rescue of American International Group and Bear Stearns. Interest-rate reductions, term extensions and principal reductions will all be considered in situations where modifying a loan returns a greater value to the central bank than foreclosure. The policy applies to loans that are at least 60 days delinquent.
Principal reductions, which represent a shift from traditional modification practices, will be used if borrowers are at risk of foreclosure. The Washington Post reports that such reductions will target loans that carry a loan-to-value ratio greater than 125%.
‘This is an important advance, and I hope to work with the board to strengthen the program," says the chairman of the Senate Committee on Banking, Housing and Urban Affairs, Sen. Chris Dodd, D-Conn. " I also urge the board to work with consumer advocates to develop the most effective program possible. I hope that under Secretary Geithner's leadership, the Treasury Department will soon join the Fed and the [Federal Deposit Insurance Corp.] in their efforts to end the rising number of foreclosures sweeping across our nation."
Alan White, an assistant professor at the Valparaiso University School of Law, comments in his Consumer Law & Policy Blog that "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 canceling it. Let's hope this design influences the soon-to-be-announced administration plan to address the foreclosure crisis."
SOURCES: Washington Post, Office of Sen. Christopher Dodd, Consumer Law & Policy Blog