The U.S. Federal Reserve is in the same boat as the banks now, dealing with a mortgage portfolio that's riddled with deficiencies and delinquencies. The central bank's New[IMAGE]York branch has been saddled with a heap of souring loans from the assets it picked up to support the 2008 bailout of Bear Stearns.
And now, as more and more of these loans Ã¢â‚¬" both residential and commercial Ã¢â‚¬" fall into default, the ""New York Fed"":http://www.newyorkfed.org/index.html is faced with a dilemma: to foreclose or not to foreclose.
It's a particularly sticky situation given the federal government's deep-seated stance on preserving homeownership and abating the foreclosure crisis in both the residential and commercial sectors, and since tax dollars, some of which came from the very property owners in arrears, helped finance the wind-down of Bear Stearns.
""For the Fed to come in and foreclose on properties puts it at some reputational and political risk,"" Vincent Reinhart, a former senior Fed staffer who is now an economist at the American Enterprise Institute, told the ""_Wall Street Journal_"":http://online.wsj.com/article/SB10001424052748704499604575407584128526218.html?mod=dist_smartbrief earlier this week.
""If the Fed can't figure out how to recast the terms of these mortgages and work with borrowers--it's emblematic of the problems the government has had with other programs over the last year and a half,"" Reinhart said.[COLUMN_BREAK]
Recent media accounts suggest that the New York Fed may pursue a tactic thatÃ¢â‚¬â„¢s become increasingly common with Fannie Mae and Freddie Mac Ã¢â‚¬" forcing the banks that originated the nonperforming loans to buy them back should officials uncover faulty underwriting.
A report by ""_Dow Jones Newswire_"":http://www.nasdaq.com/aspx/stock-market-news-story.aspx?storyid=201008041749dowjonesdjonline000728&title=new-york-fed-may-tell-banks-to-take-back-bad-mortgages asserts that even JPMorgan Chase, which absorbed the failed Bear Stearns at the prodding of the federal government, could be on the hook for the bad Bear assets.
Other large lenders like Bank of America, as well as investment banks that issued the toxic loan pools, such as Goldman Sachs and UBS AG, may be strong-armed into repurchasing some of the bad mortgages from the Fed Ã¢â‚¬" making the Wall Street banks the bad guys and allowing the central bank to detach itself from distasteful foreclosure actions.
Jack Gutt, a New York Fed spokesman, told ""_CNBC_"":http://www.cnbc.com/id/38565847 this week that the federal bank is ""involved in multiple efforts related to exercising our rights as investors in non-agency RMBS [residential mortgage-backed securities] or CDO [collateralized debt obligation] securities, including those that require originators to repurchase ineligible loans,"" from its Bear Stearns portfolio, as well as the portfolio the central bank took over from insurance giant American International Group (AIG).
In another development related to the Federal ReserveÃ¢â‚¬â„¢s mortgage dealings, the central bankÃ¢â‚¬â„¢s New York branch has begun testing a ""method called reverse repos"":http://www.newyorkfed.org/markets/opolicy/operating_policy_100803.html to contract its massive $1.5 trillion-plus portfolio of mortgage-backed securities (MBS) and debt purchased from Fannie Mae, Freddie Mac, and Ginnie Mae over the course of the past year.
A reverse repurchase, or reverse repo, allows the Fed to use securities as collateral in exchange for cash, with an agreement in place that the Fed will buy back the securities at a fixed price at some later date. On Wednesday, for the first time, the New York Fed used $180 million in agency MBS for reverse repurchase agreements with primary bond dealers.