Federal Reserve Chairman Floats New Idea for Massive Government Buyout of Bad Mortgages

December 4, 2008 - 6:11 PM
Fed Chairman proposed Thursday that the government buy delinquent or at-risk mortgages in bulk – then refinance them into federally insured loans. 

In this Sept. 24, 2008 file photo, Federal Reserve Chairman Ben Bernanke, accompanied by Treasury Secretary Henry Paulson, testifies on Capitol Hill. (AP Photo/Manuel Balce Ceneta, file)

Washington (CNSNews.com) – Federal Reserve Chairman Ben Bernanke proposed Thursday that the federal government buy delinquent or at-risk mortgages in bulk – then refinance them into federally insured loans. Bernanke said both the Fed and Treasury Department are considering the idea.

“Yet another promising proposal for foreclosure prevention would have the government purchase delinquent or at-risk mortgages in bulk and then refinance them into the H4H or another FHA program,” Bernanke told attendees at a housing finance conference in Washington, D.C.
H4H is the federally-run Hope for Homeowners program, which allows lenders to refinance delinquent mortgages into new loans insured by the Federal Housing Administration (FHA), if the lender “writes down” some of the mortgage balance.

In return, the homeowner would be required to share any appreciation – increase in value – of the home with the federal government.

Bernanke admits writing down mortgages reduces their value, thereby reducing the incomes of the company which writes down the mortgage. Writing down too many mortgages could reduce a company’s income to zero.

“The Treasury has already considered how to undertake bulk purchases as part of its work under EESA,” he said, “and the Federal Reserve has submitted to Congress an analysis of bulk purchases.”

EESA is the Emergency Economic Stabilization Act – the proper name of the federal bailout law passed in October.

Bernanke admitted that such a program would be both costly and time-consuming, but said that the program would result in many people getting new mortgages.

“This program could take some time to get up and running,” Bernanke warned, adding “the re-underwriting required for H4H loans would likely take more time and incur greater operational costs than other plans.”

“But such an approach could result in many homeowners being refinanced.”

Bernanke ended his remarks by saying that programs which aim to prevent foreclosure, such as the ones he proposed, should be a high government priority.

“As we as a country consider ways to address our financial and economic challenges, policy initiatives to reduce the number of preventable foreclosures should be high on the agenda?” Bernake asked.

Last week, the Fed announced plans to buy up to $500 billion in mortgage-backed securities and up to $100 billion in debt from failed mortgage titans Fannie Mae and Freddie Mac. 

On the same day, Treasury announced a separate program to use $20 billion from the federal bailout to kick-start another Fed program for purchasing mortgage-backed securities from the private sector, at a projected total cost of $200 billion.

Bernanke did not offer a cost estimate for the government-buyout proposal.