With its bailouts of Bear Stearns and American International Group, the Federal Reserve took a vast portfolio of mortgages onto its books. Now, it is trying to use its control of billions of dollars worth of home loans to help prevent foreclosures. The Fed will seek to revise negotiated mortgage terms it owns that might otherwise enter foreclosure, Chairman Ben S. Bernanke told congressional leaders in a letter yesterday. The decision won praise from congressional Democrats, who took it as a sign that the central bank’s leaders are cooperating with mortgage relief efforts from the government’s power to try to reduce home foreclosures nationally.

It is unclear how many homeowners stand to benefit. Under the program, the Federal Reserve can provide loan modifications by reducing what a homeowner owes on a mortgage, lower the interest rate, lengthen the term of a loan or take other steps to keep a loan from defaulting, if doing so would offer taxpayers a better long-term payoff than foreclosure. Individual borrowers are unlikely to know whether their mortgage loans are owned by the Fed, but if they qualify for a renegotiation, they would deal only with their mortgage servicer.  The Fed is emphasizing reducing the amount of principal owed by people at risk of foreclosure, particularly those with a mortgage loan balance that is more than 125% of the estimated value of their property. Private lenders have been reluctant to renegotiate mortgage rates that way, as some of the institutions that own those loans, in the form of mortgage-backed securities, stand to lose money and therefore object.  Bernanke has previously advocated principal reductions, saying in a speech in March that they could be an “effective means of avoiding delinquency and foreclosure.” Mortgage modification programs remain the hottest alternative to home refinancing.

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