Relief urged for imperiled borrowers

The Federal Reserve and other banking regulators issued special guidance Tuesday urging loan service companies to work with borrowers in danger of defaulting on their mortgages.

The guidelines are not mandatory, but the regulators expressed hope that companies that collect payments on mortgages would heed the advice.

Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., said mortgage collectors have the authority under existing accounting and tax rules to help deserving borrowers.

“More and more consumers with sub-prime and hybrid mortgage products are facing the very real prospect of losing their homes through foreclosure as their payments reset and become unaffordable,” Bair said. “It is vital that mortgage servicers work proactively with borrowers facing much higher payments.”

The guidance followed President Bush’s announcement Friday that his administration was advancing proposals aimed at preventing defaults expected over the next two years as the housing industry endures a serious downturn.

An estimated 2 million adjustable-rate mortgages are scheduled to reset by the end of 2008, going from low introductory interest rates to higher rates.

Already there have been a rising number of defaults of sub-prime mortgages, loans that were extended to borrowers with weak credit histories. Those increasing defaults have roiled financial markets in recent weeks.

The guidance said strategies to ward off defaults could include deferring payments or modifying the terms, such as extending the length of the loan or rolling missed payments into the total owed.

Modifications also could include converting the loan from an adjustable-rate loan to a fixed-rate mortgage.