Mortgage Changes

The Financial Turmoil is Ongoing

The Federal Housing Administration will begin an expanded effort next week to help a larger group of troubled homeowners refinance their adjustable mortgages. Under the plan, homeowners would be eligible to refinance even if they have missed up to three monthly mortgage payments over the previous 12 months.

Homeowners who have fallen behind on their payments because of job loss, declining wages and family illness would also be eligible, even if their rates have not increased. Homeowners are now eligible only if they were current on their mortgages before their interest rate was adjusted upward.

For its part, Congress is close to completing legislation on a $300 billion foreclosure-rescue plan that would help troubled borrowers refinance into more affordable loans insured by the federal government. The Senate is expected to approve a measure by next week.

The Fed created the lending programs to Wall Street in March as part of a broader effort to prevent financial institutions from collapsing, as Bear Stearns nearly did before it was sold under heavy pressure from the Fed and the Bush administration to JPMorgan Chase.

The lending programs to the investment banks, a broad expansion of the Fed’s historic practice of providing loans only to commercial banks that the Fed supervises, are intended to provide confidence to financial institutions that they will have enough cash to meet their daily needs. And by permitting investment banks to post collateral for Fed loans, including hard-to-sell financial instruments backed by mortgages, the programs have helped prop up the enormous and troubled market in securities sold by Fannie Mae and Freddie Mac, the all-important mortgage-finance companies.

The two buyers of mortgages, which together held more than $1.4 trillion of mortgage-backed bonds as of the end of last year, have struggled in recent months through the wave of foreclosures and declining housing markets. On Tuesday, Fannie Mae closed up nearly 12 percent, and Freddie Mac rose 13 percent, after their regulator said he would probably not force them to raise more capital because of an accounting rule change. The shares of both government-chartered companies had tumbled on Monday amid concerns over the accounting rule and worries that the worst of the mortgage crisis was yet to come.

Officials said that the Federal Reserve remained concerned that the declining housing market would not reach its bottom and financial markets would not become more stable before some time next year, and that the economy would continue to suffer as a result of declining consumer confidence, a sluggish global economy and the widespread effects of the rapid jump in oil prices.

“The financial turmoil is ongoing, and our efforts today are concentrated on helping the financial system return to more normal functioning,” Mr. Bernanke said at a forum in Virginia on lending for low- and moderate-income households. He did not provide a forecast of how soon he expected markets would begin to turn. July 11, 2008

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