Fed Moves to Help Distressed Homeowners

With foreclosures spiking, the Federal Reserve is taking steps to try to keep some distressed borrowers in their homes.

Under the program, the Fed has a number of options to provide relief, including lowering the amount the homeowner owes on the mortgage, reducing the interest rate or lengthening the term of the loan.

It's unclear how many homeowners would benefit.

However, the relief plan would apply to the billions of dollars of mortgage assets the Fed is holding on its books because of last year's bailouts of Bear Stearns and insurer American International Group.

In general, a borrower must be at least 60 days delinquent to qualify for help, although the Fed has leeway to make some exceptions.

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A 2008 law that set up the $700 billion bailout fund instructed the Fed to take such foreclosure relief action.

"The goal of the policy is to avoid preventable foreclosures on residential mortgage assets that are held, owned or controlled by a Federal Reserve Bank," Fed Chairman Ben Bernanke wrote in a letter Tuesday to Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee.

Bernanke has repeatedly urged Congress and—more recently—the administration of President Barack Obama to ramp up efforts to curb home foreclosures, which are aggravating the economy's problems.

The new administration is examining ways to stem foreclosures.

Sen. Chris Dodd, D-Conn., chairman of the Senate Banking Committee, welcomed the Fed's program and called it "an important advance." The Fed's Bear Stearns' portfolio is valued at $27 billion, although the central bank doesn't say how much of that is in home mortgages.

The Fed's AIG assets include one portfolio valued at nearly $20 billion of residential mortgage-backed securities and a second portfolio valued at nearly $27 billion of collateralized debt obligations, which are complex financial instruments that combine various slices of debt.

More than 2.3 million homeowners faced foreclosure proceedings last year, a whopping 81 percent increase from 2007.

And more than 860,000 properties nationwide were actually repossessed by lenders last year, more than double the 2007 level, according to RealtyTrac, a California-based foreclosure listing firm. Nevada, Florida, Arizona and California had the highest foreclosure rates last year.

Housing, credit and financial crises—the worst since the 1930s— have plunged the country into a recession, now in its second year. So far, a slew of radical government programs have failed to remedy the problems.

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