WASHINGTON — A new Federal Reserve strategy to limit foreclosures on mortgages it controls could shed light on the contours of a broader plan being developed by the Obama administration to help keep people in their homes.
The new policy, adopted by the Fed without fanfare last week and provided to key lawmakers Tuesday, allows for loan modifications for some troubled borrowers -- possibly including a reduction of the amount owed -- if the mortgage servicer determines that the loss from rewriting the loan would be less than the loss from foreclosure.
Interest in the policy grew as the central bank said Wednesday that it would continue to hold its benchmark interest rate close to zero and to use "all available tools to promote the resumption of sustainable economic growth."
In a statement issued after its regular meeting, the Fed's policymaking committee said it still expected an economic recovery to begin "later this year." But the panel also said there was a significant chance its prediction was premature.
Since the credit markets seized up last year, the Fed has tried to restart them by slashing interest rates as low as they can go, to a range of zero to 0.25%, and by buying financial assets as a way to support lending.
Although the Fed's moves have helped stabilize the financial sector, economists say the central bank won't be able to foster a larger economic recovery without massive action by the federal government to address the banking crisis and stem the tide of foreclosures.
The Fed's policy is notable for its explicit endorsement of write-downs of principal.
The Federal Deposit Insurance Corp. initiated an aggressive loan-modification program at IndyMac Federal Bank, which the FDIC has been running since IndyMac's failure last summer. The FDIC's plan permits a reduction of a loan's interest rate and an extension of its term, but doesn't allow for principal write-downs.
Bank of America Corp., which acquired Countrywide Financial last year, agreed in a settlement of a court case to offer principal write-downs on certain loans.
The central bank's policy applies only to mortgages the Fed controls via $74 billion in mortgage-related assets it acquired last year from the collapse of investment house Bear Stearns and from the central bank's bailout of insurer American International Group Inc.
