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Tuesday, January 27, 2009 3:32 PM

Fed's "Homeownership Preservation Policy" Doomed To Failure

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The Fed is doing everything humanly possible it can to make matters worse. Please consider Fed Adopts Policy to Modify Mortgages, Stem Home Foreclosures

The Federal Reserve will ease terms on residential mortgages acquired in the rescues of Bear Stearns Cos. and American International Group Inc., seeking to stem foreclosures.

The Fed policy is targeting borrowers who are 60 days or more overdue on loan payments and covers modifications of interest rates and payment plans. The program uses the Fed’s authority in the $700 billion Troubled Asset Relief Program and was released today by the House Financial Services Committee.

“It reflects the understandable desire of the Federal Reserve to have some cooperation” with the Obama administration, House Financial Services Committee Chairman Barney Frank told reporters today in Washington. “This is a very big deal.”

The Fed’s “Homeownership Preservation Policy” lets the central bank or its agents “promptly” review applicable mortgages to determine whether the borrowers should be offered a loan modification, the document said. Qualified borrowers must be at least 60 days late on their payments.

The policy applies to the residential-mortgage assets the Fed acquired in its rescues of Bear Stearns in March and AIG in September.

The Fed will distinguish between loans in which the central bank may hold only a fractional interest along with other investors, the Fed said. It will encourage the servicers of those residential mortgage-backed securities “to implement a loan-modification program that is consistent with this policy,” according to the document.
The Fed's "Homeownership Preservation Policy" will not preserve many homes, but it will encourage homeowners to get 60 days late. For now, the policy only pertains to AIG and Bear Stearns loans, a very small subset of loans. When the policy fails, as it will, expect the Fed to expand it to other areas. Every failed policy to date has been expanded. This one will be no different.

Mike "Mish" Shedlock
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