Fed Says Some Home Loans in Bear Portfolio Became Delinquent

The Federal Reserve said some home loans in the $30 billion asset portfolio acquired in the rescue of Bear Stearns Cos. became delinquent and were modified to avert foreclosure, according to a central bank official.

The Fed will soon adopt a policy on modifying home loans owned by the central bank in response to a provision in legislation creating a $700 billion financial-rescue program, Fed Governor Elizabeth Duke told Senate Banking Committee Chairman Christopher Dodd on Jan. 12. An excerpt of the letter, responding to an inquiry from an Oct. 23 hearing, was obtained by Bloomberg News.

The letter suggests that the central bank’s markdown of the portfolio value to $27.1 billion from $30 billion in March was partly due to losses from delinquent loans. Since the Bear Stearns rescue, the Fed has taken on more credit risk with the bailout of American International Group Inc. and direct purchases of mortgage-backed securities.

As of Nov. 30, about 11 percent of the “whole loans” in Maiden Lane that were “both nonperforming and more than 60 days past due had been permanently modified through a reduction in interest rate, an extension of term, a deferral or reduction in the principal balance, or a combination of such actions,” Duke said.

All residential whole loans in the former Bear Stearns portfolio, now held in a Fed-created company called Maiden Lane LLC, were performing as of March 14, 2008, the Fed said.

Wells Fargo & Co. and EMC Mortgage Corp., a former Bear Stearns unit now part of JPMorgan Chase & Co., are servicing the whole loans in the former Bear Stearns portfolio, Duke said. The companies are using “industry standard protocols for loan modifications” consistent with the industry’s voluntary Hope Now Alliance, Duke said.

Verification Period

“The number of permanent loan modifications is expected to increase in the coming months” because the verification period for modified loans takes three months and more delinquent borrowers will be contacted and finish the negotiation process, Duke said.

Most home-loan assets in the former Bear Stearns portfolio are in the form of mortgage-backed securities, and the Fed “does not have direct control” over servicing those loans, Duke said.

The Fed extended a $28.8 billion loan to purchase the assets, and JPMorgan is absorbing the first $1.15 billion of any losses realized on the holdings. The central bank in March agreed to the transaction to ease JPMorgan’s purchase of Bear Stearns and avert a bankruptcy of the investment bank.

Dodd, a Democrat from Connecticut, said earlier today that Duke took three months to “half-heartedly” reply to his inquiry on how the Fed could prevent foreclosures on mortgages it “effectively owns” as a result of the Bear Stearns rescue.

‘That’s Unacceptable’

“That’s unacceptable,” Dodd said at a confirmation hearing for Fed board nominee Daniel Tarullo. Duke wasn’t present. Fed spokeswoman Michelle Smith had no immediate comment on Dodd’s remarks.

Section 110 of the financial bailout bill calls for the Fed and other agencies to “implement a plan that seeks to maximize assistance for homeowners and use its authority” to encourage companies servicing mortgages owned by the government to use certain programs to reduce foreclosures.

“The Board is in the final stages of developing a foreclosure mitigation policy for use by the Federal Reserve Banks,” Duke said. “In addition to applying this policy in situations required by section 110, the Board will consider whether there are situations in which it is appropriate and feasible for the Board to apply the policy voluntarily.”

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Fed Says Some Home Loans in Bear Portfolio Became Delinquent