Federal Reserve To Loan Companies: Work To Prevent Defaults

WASHINGTON (AP) – The Federal Reserve and other banking regulators issued special guidance Tuesday urging loan service companies to work with borrowers in danger of defaulting on their home mortgages.

The guidance issued by the Fed and the other agencies followed President Bush’s announcement Friday that his administration was putting forward proposals aimed at preventing defaults expected over the next two years as the housing industry goes through a serious downturn. The guidance was aimed at addressing the problem that in many cases the company in charge of collecting monthly mortgage payments is not the same company that originated the loan.

The guidance said that appropriate strategies to ward off defaults could include modifying the terms of the loan or deferring payments. “In addition, institutions should consider referring appropriate borrowers to qualified homeownership counseling services that may be able to work with all parties to avoid unnecessary foreclosures,” the regulators said in a statement announcing their action.

Fed Governor Randall Kroszner said that the joint guidance was meant to encourage the companies that collect payments on mortgages packaged into certain debt securities and sold in debt markets to “reach out to financially stressed homeowners.” “Keeping families in their homes is a matter of great importance to the Federal Reserve,” said Kroszner, one of the Fed board members who has taken the lead in dealing with the current mortgage crisis.

The effort by Bush and the banking agencies was seen as attempt to deal with growing anxiety as up to 2 million homeowners worry about losing their homes because they can no longer meet the mortgage payments. An estimated 2 million adjustable rate mortgages are scheduled to reset by the end of 2008, going from low introductory interest rates to higher rates that in some cases will double or even triple the monthly payment.

Already there has been a rising number of defaults of subprime mortgages, loans that were extended to borrowers with weak credit histories. Those rising defaults have roiled financial markets in recent weeks as investors have worried about whether the credit markets will be destabilized by a rising tide of bad loans.

By MARTIN CRUTSINGER AP Economics Writer

(Copyright 2007 by The Associated Press. All Rights Reserved.)