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Fed Urges Mortgage Firms To Help Prevent Defaults

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By MARTIN CRUTSINGER, The Associated Press

Published: September 5, 2007

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

The new guidelines are not mandatory, but regulators expressed hope that companies that collect payments on mortgages will heed the advice.

Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., said mortgage collectors have the authority under existing accounting and tax rules to help deserving borrowers.

'More and more consumers with subprime and hybrid mortgage products are facing the very real prospect of losing their homes through foreclosure as their payments reset and become unaffordable,' she said. 'It is vital that mortgage servicers work proactively with borrowers facing much higher payments as their interest rates reset.'

The guidelines were aimed at addressing the fact that in many cases the company collecting monthly mortgage payments is not the same company that originated the loan.

Servicers are advised that appropriate strategies to ward off defaults could include modifying terms of loans or deferring payments. Modifications could include conversion from an adjustable rate loan, one in which the interest rate resets at intervals, to a fixed-rate mortgage, which would keep the monthly payments from increasing.

Other possible modifications could include extending the length of the loan and rolling the amount of payments that the borrower has missed into the total loan amount that must be paid.

'Reworking these loans will achieve long-term sustainable obligations to provide stability to borrowers, investors and the marketplace,' Bair said.

The joint statement also encourages mortgage servicing companies to consider referring borrowers in trouble to qualified homeownership counseling services.

The banking regulators' guidance came after President Bush's announcement Friday that his administration was putting forward proposals aimed at preventing defaults expected in the next two years as the housing industry goes through a serious downturn.

An estimated 2 million adjustable rate mortgages are to reset by the end of 2008, going from low introductory interest rates to higher rates.

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