If the Fed strategy works and reduces the number of foreclosures while helping the owner of the loans — the central bank in this case — it could serve as a model for other owners of mortgage loans. For example, the Federal Deposit Insurance Corp. has tried to use its control of California bank IndyMac, which it seized last summer, to do loan modifications, but has been frustrated by investors in those loans being unwilling to reduce the amount of principal owed. “It’s a step beyond what FDIC is doing with its own portfolio,” said Alan White, an assistant professor at Valparaiso University School of Law, who has been studying the foreclosure crisis. “Principal write-downs are still the critical issue” in keeping borrowers in their homes. It is impossible, based on public information, to know the exact dollar value of the mortgages the Fed holds — though it is in the tens of billions of dollars. In the near term, the mortgage loans affected are those held in special limited liability corporations that the central bank created to hold assets after its March rescue of investment bank Bear Stearns and September takeover of insurance company AIG.
The Bear Stearns portfolio is worth $27 billion, of which some portion — exactly how much the Fed will not disclose — consists of residential mortgages. The AIG assets include a $20 billion portfolio of mortgage-backed securities and a $27 billion portfolio that includes complex securities that are partly backed by mortgage debt. Congressional leaders yesterday praised the Fed’s action, while urging further steps. “This is an important advance, and I hope to work with the [Fed] to strengthen the program,” said Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate Banking Committee. Dodd also urged the Fed “to work with consumer advocates to develop the most effective program possible.”