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Feds Urge Lenders To Help Stave Off Foreclosures

Interagency statement recommends "mitigation strategies" to avoid default

by Martin H. Bosworth
ConsumerAffairs.com

September 5, 2007

The agencies suggested "loss mitigation strategies" to prevent cash-strapped homeowners from going into default on their loans and facing foreclosure.

The task force, led by the Federal Reserve, urged holders of investments backed by subprime loans to reassess the documentation of their governing trusts to determine if they can offer better terms to borrowers in trouble.

The agencies recommended proactively contacting homeowners who were already in tougher financial straits and assessing the likelihood of their ability to repay their loans versus the likelihood of default or foreclosure.

Among the strategies recommended for use were converting subprime loans to prime interest loans at fixed rates,deferring payments for a period of time, or otherwise modifying or altering the loan terms.

"Loss mitigation techniques that preserve homeownership are generally less costly than foreclosure, particularly when applied before default," the agencies said. "Where appropriate, servicers are encouraged to apply loss mitigation techniques that result in mortgage obligations that the borrower can meet in a sustained manner over the long term."

The task force also includes the Office of Thrift Supervision, the Office of the Comptroller of the Currency, the National Credit Union Administration, the Federal Deposit Insurance Corporation, and state lenders represented by the Conference of State Bank Supervisors. The task force reiterated earlier recommendations to help homeowners previously published in April.

The task force had previously recommended stricter rules for governing subprime lenders, such as providing clear timelines of when adjustable-rate mortgages may reset over the course of a loan, and more comprehensive verification of borrowers' income and assets before approving loans.

The task force also promised stronger oversight of non-bank subprime lenders.

The recommendation is the latest in a series of moves by the Federal Reserve to stabilize the imploding real estate market and prevent the economy from tilting into recession.

Federal Reserve chairman Ben Bernanke has repeatedly promised that the Fed will act to prevent widespread economic instability, though he continues to reject calls from the financial markets for a full-scale bailout of the mortgage sector.

President Bush has similarly rejected the notion of a bailout, even as he unveiled plans to help endangered homeowners refinance into loans backed by the Federal Housing Administration. Bush's plan was criticized for its small scale, as only 80,000 homeowners may currently qualify for the refinancing.

Wall Street is slowly increasing calls for the Federal Reserve to cut interest rates in order to spur more lending and consumer spending. Bernanke, who has presided over a pattern of keeping rates steady for many months since taking office, has not signaled definitively that the Fed may cut rates.

In recent speeches, however, he has conceded that the housing crash is causing a greater drag on the economy than previously anticipated, which may indicate more direct action.

The Federal Reserve's next meeting is scheduled for September 18.

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