The Federal Reserve Bank will use the billions of dollars worth of home loans it acquired when it bailed out Bear Stearns and “American International Group”:http://www.aig.com (AIG) to help stem foreclosures, according to multiple media reports.
The Fed will seek to renegotiate the mortgages in owns that are in danger of foreclosure, either by lowering the amount owed on the mortgage, reducing the interest rate, or lengthening the term of the loan, Fed Chairman Ben Bernanke told congressional leaders in a letter Tuesday.
It is unclear how many homeowners the plan would help, but modifications will only be allowed when it is better for taxpayers than foreclosure. Homeowners will renegotiate their mortgage with their mortgage servicer, if they qualify.

The Fed will focus its efforts on homeowners who are underwater on their mortgage because those loans are the ones least likely to be modified by private lenders.
Homeowners won’t know if their mortgage is owned by the Fed, but the Bear Stearns portfolio is worth $27 billion of which a portion, the Fed won’t say how much, is made of residential mortgages. AIG has a $20 billion portfolio of mortgage-backed securities and another $27 billion portfolio that includes securities partially backed by mortgages.
Experts said the plan could serve as a model for further foreclosure prevention by private lenders. The Federal Deposit Insurance Corp. (FDIC) has attempted to use its control of IndyMac modify loans, but has been hindered by investors unwilling to allow the reduction of loan principal.
Alan White, an assistant professor at Valparaiso University School of Law in Indiana, has been studying the foreclosure crisis and told The Washington Post, “It’s a step beyond what FDIC is doing with its own portfolio. Principal write-downs are still the critical issue” in keeping borrowers in their homes.
Democratic congressional leaders praised the plan. Sen. Christopher J. Dodd, chairman of the Senate Banking Committee, told the Post, “This is an important advance, and I hope to work with the [Fed] to strengthen the program,” but urged the Fed “to work with consumer advocates to develop the most effective program possible.”