In an effort to stem foreclosures, the Fed announced today that it may come to the aid of some troubled borrowers by requiring loan servicers to modify Fed-owned and Fed-controlled mortgages.

Specifically, The Fed will put pressure on 1) loan servicers of mortgages that the Fed wholly owns and 2) loan servicers of mortgages that the Fed partially owns (because the mortgages are part of a MBS or CDO).  

The Fed can do this because some lenders, investment banks, and insurance companies sold whole mortgages, mortgage-backed securities (MBS’s), and collateralized debt obligations (CDO’s) to the Federal Reserve or pledged them with the Fed as collateral - - in exchange for the cash they received from the Fed.  So the Fed owns whole, stand-alone mortgages AND slices of MBS’s and CDO’s (which are comprised of several mortgages).

The new policy sounds good but, like so many other government programs and policies that were rolled out in the last year, widespread efficacy is yet to be shown. So it is unknown how many borrowers will actually be helped by the new policy.

Again, this is because part of what the Fed owns are just slices of MBS’s and CDO’s. The Fed can encourage loan servicers of mortgages in these instruments to modify eligible loans; however, the Fed is only one of many owners. The other owners of these assets must be identified so they, too, can approve a loan modification.   

The Fed’s new policy is one of “Don’t call us, we’ll call you,” because it is virtually impossible for borrowers to proactively find out if the Fed owns or controls their mortgage.

So here’s how you’ll know if your mortgage is owned by the Fed:

The Fed is instructing loan servicers (of the fed’s mortgages) to search their files for borrowers who are delinquent by 60-days or more with a debt-to-income ratio of 38% or less and determine if their loans can be modified. If a loan is modifiable, the borrower will get a call or letter from his/her loan servicer offering a loan modification. 

The loan modification could include an interest rate reduction, principal write-down, and/or loan term extension (i.e., from 30-years to 40-years).