On Friday, the Federal Reserve announced the adoption of a new "Homeownership Preservation Policy for Residential Mortgage Assets" that is intended to "avoid preventable foreclosures on [residential mortgage assets owned or controlled by Reserve Banks] through sustainable loan modifications and other actions that are consistent with the Federal Reserve’s obligation to maximize the net present value of the assets for the benefit of taxpayers." The new policy will apply to the residential mortgage assets held by Maiden Lane, LLC (formed to facilitate the acquisition of Bear Stearns by JP Morgan Chase) and Maiden Lane II, LLC and Maiden Lane III, LLC (formed in connection with the government assistance provided to AIG). The policy was adopted under Section 110 of the Emergency Econopmic Stabilisation Act of 2008, which generally requires each Federal property manager that holds, owns, or controls residential mortgage-related assets implement a plan that "seeks to maximize assistance for homeowners ..., considering net present value to the taxpayer, to take advantage of the HOPE for Homeowners program ... or other available programs to minimize foreclosures."
If a Reserve Bank holds, owns, or controls residential mortgage assets subject to section 110, the Reserve Bank or its agent will take the following steps:
- Proactive Review: the Reserve Bank or its agent will promptly review the covered residential mortgage loans to determine which, if any, borrowers should be offered a loan modification in accordance with this Policy. Priority will be given to residential properties that are owner-occupied.
- Loan Modifications: The borrower generally must be at least 60 days delinquent, but exceptions may be made for borrowers expecting a trigger event (such as a interest rate reset) or experiencing a decline in income that “is likely to result in the borrower becoming 60 days or more past due.” Based on the type of property at issue, the modified terms may include reduction in the interest rate, extension of the term of the loan, deferral or reduction of the outstanding principal balance of the loan, or changes to other terms of the loan.
- Temporary Repayment Plans: the Reserve Bank or its agent may offer repayment plans or other types of short-term assistance in lieu of formal loan modifications.
- Exceptions Authority: A Reserve Banks or its agent may make exceptions to this Policy when such exceptions are appropriate and consistent with the goal of this Policy to avoid preventable foreclosures on residential mortgage assets subject to the Policy through sustainable loan modifications and other actions that are consistent with the Federal Reserve’s obligation to maximize the net present value of the assets for the benefit of taxpayers. The Reserve Bank will consult with the Federal Reserve Board regarding any exceptions.
- Borrower Outreach: The Reserve Bank or its agent will engage in outreach efforts to borrowers who are identified as at risk of becoming 60 days or more delinquent. The Reserve Bank or its agent will also cooperate with qualified third parties such as nonprofit housing counselors to help reach troubled borrowers.
- Other Homeowner Assistance Programs: the Reserve Bank or its agent will inform the borrower that other programs may be available, encourage them to investigate those alternatives, and work with the borrower as appropriate to facilitate the loan modification process.
- Property Maintenance and Vacancy Prevention: If a Reserve Bank takes control of real-estate owned property through foreclosure or deed-in-lieu-of foreclosure, the Reserve Bank or its agent will direct servicers to properly secure and maintain the property to minimize impact on the surrounding neighborhood.
- Monitoring and Updates: The Federal Reserve will review the Policy on an ongoing basis and monitor its implementation if the Federal Reserve becomes a Federal property manager. Based on its periodic reviews, the Federal Reserve may, in consultation with the Reserve Banks, modify the Policy as appropriate.