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Jake Z

Surely This News Will Have Little Effect

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from Associated Press

Federal Reserve, other banking agencies, urge loan

companies to work to prevent defaults


AP Economics Writer

WASHINGTON (AP) - The Federal Reserve and other U.S.

banking regulators issued special guidance Tuesday urging

loan service companies to work with borrowers in danger of

defaulting on their home mortgages.

The guidance issued by the Fed and the other agencies

followed President George W. 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.

Surely this fails to get to the root of the problems facing the big banks, and hence the world's economic system. If the terms of the loans are modified, or payments deferred, that will affect the value of any derivatives based on those mortgages. Notice also that this is "guidance".

If this is the best the US government can come up with, they're p***ing into the wind, quite frankly. I hardly think news like this is likely to tempt banks back into the commercial lending game.

Also, another question for you experts out there. The Fed injected all that liquidity recently and accepted types of mortgage backed securities as collateral that wouldn't normally be accepted. What happens if the market for these instruments fails to recover in the medium to long term. Either the Fed has to take a loss, or a lot of banks are going to the wall, no?


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