The Federal Reserve made a radical move to “keep families in their homes”. The Fed is asking banks and other institutions to pursue a loss mitigation strategy for homeowners behind on their mortgages by offering loan modifications, deferral of payments, or a reduction in principal.

The sudden action by President Bush on Friday and the Fed today signals to me the opportunity for the housing and credit downturn to really morph into dangerous territory. Think of it this way, you are an average Joe for whom money is tight. All of a sudden on the television and the radio there is news that you will not get nailed if you do not pay your mortgage this month, that banks have to work with you.

So instead of selling the car, or cutting way back on expenses, now you are putting your home at risk because the government has just signaled that this is the way to go. I was always raised that the mortgage was the first bill paid, no matter what. I am afraid that the actions of the government and Fed this past week may create a different climate. And that leaves the door wide open for the law of unintended consequences to poke it’s head through to create even more havoc.

Also, this is an election period. Now that the President has done something, and the Fed has done something, you know Congress is going to do something so they can go back to their districts telling the world they did something. And when many somethings are done in Washington we are all screwed.

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.  via the AP

Related posts:

1. Federal Reserve Initiates 9.9 Billion Dollar Loan Modification Plan
2. Federal Reserve Offers TALF To Commercial Lending
3. Strategic Mortgage Defaults Rising in Hard Hit Regions
4. Commercial Real Estate Meltdown Keeps Federal Reserve From Raising Interest Rates