The Federal Reserve plans to modify mortgages it controls in order to help reduce foreclosures, Fed Chairman Ben Bernanke said on Tuesday -- though there's basically no way for homeowners to determine whether they are eligible, and they'll likely have to wait for a call from a mortgage servicer to know for sure.

In a letter to House Financial Service Committee Chairman Barney Frank (D-Mass.), Bernanke outlined a new policy in which the Federal Reserve will modify mortgages that it controls. These mortgages are the collateral that banks have given the Fed in return for access to money from the Federal Reserve.

“The goal of this policy is to avoid preventable foreclosures on residential mortgage assets that are held, owned or controlled by a Federal Reserve Bank,” Bernanke said in the letter. “In addition, the Board has decided to apply this policy more widely. In particular, the board has determined to apply the policy to the residential mortgage assets that serve as collateral for the discount window loans extended by the Federal Reserve.”

Senate Banking Committee Chairman Christopher Dodd (D-Conn.) said he’d like the Treasury Department to do the same sort of thing.

“I hope that under Secretary Geithner’s leadership, the Treasury Department will soon join the Fed and the [Federal Deposit Insurance Corp.] in their efforts to end the rising number of foreclosures sweeping across our nation,” Dodd said.

In the aftermath of the housing bubble, millions of households have either suffered foreclosure or have been put at risk of it. House prices have fallen, but with credit so tight there have been fewer buyers as well. Homeowners in many cases have found themselves under water, with their house worth less than their mortgage -- and with job losses starting to pile up, the threat of foreclosure hasn’t gone away.

Since the weak housing market is widely believed to be at the root of the economic malaise, many economists believe that turning it around is the key to reviving the economy overall, leading to measures such as this that are designed to slow or stop the decline.

There is no way for homeowners to figure out if their mortgages are being held or controlled as collateral by the Federal Reserve. For example, mortgages were part of the $29 billion offered as collateral to the Federal Reserve when it bailed out Bear Stearns and JP Morgan Chase. 

The Federal Reserve will instruct mortgage servicers who service those mortgages to identify borrowers who may be falling behind on payments and may be eligible for relief. Those borrowers will be contacted perhaps by letter, perhaps by phone. It has not yet been determined how to let them know they may be eligible for mortgage relief. 

Mortgages that are deemed eligible for modification could have a reduction in interest rate, an extension of the term of the loan, a deferral or reduction of the outstanding principal balance of the loan or changes to other terms of the loan.

The Fed will require mortgage servicers at institutions that deal with the Fed to carry out the modifications. In cases where the mortgages are on the Federal Reserve books as collateral, an agent of the Federal Reserve will do the actual modification.

The Fed has been purchasing large amounts of mortgage-backed securities. It will be more difficult to help borrowers whose mortgages have been bundled in MBSs or CDOs. In cases where the Federal Reserve controls the MBS or CDO -- such as what it's buying now from Fannie Mae (FNM) and Freddie Mac (FRE) -- it will be able to instruct servicers to identify people in trouble and to offer mortgage relief. 

The Fed has said it plans to purchase $500 billion of MBS from Fannie and Freddie. But in cases where banks have offered MBSs or CDOs as collateral other than in the Bear Stearns deal, the Fed does not own it, and can only request that services of the mortgages in those bundles offer relief to borrowers.

Letter from Ben Bernanke to Barney Frank on Home Ownership Preservation

Homeownership Preservation Policy for Residential Mortgage Assets