For some homeowners, that wolf at the door is actually the Federal Reserve:

James Currell is struggling to prevent his Minnesota home from being foreclosed. But his lender isn’t a bank. It is the U.S. government.

The Federal Reserve Bank of New York is facing the prospect of foreclosing on a number of properties in the coming months, from homes to commercial buildings, a result of a souring mortgage portfolio it took over when it helped bail out Bear Stearns in 2008.

As it deals with delinquent borrowers, a team of New York Fed officials and outside advisers are trying to avoid having the U.S. government, along with local sheriff’s departments, seize commercial properties and homes as it copes with falling real-estate values. In the process, the New York Fed is getting a hard lesson in the challenges of mortgage lending.

Wondering what the Fed holds? Here’s a chart of the Bear assets courtesy of the WSJ:

If the Fed starts foreclosing, many elements make this situation a hot mess:

- The Fed has obviously been touting the importance of mortgage modifications, working with borrowers, etc… so, foreclosing on homeowners is in some ways an admittance that the programs designed to keep people in their homes are doin it rong
- Legislators aren’t going to want anyone in their districts kicked out of their homes by the gov’mint (and don’t try to give me that “the Fed is an independent entity” line…)
- This was a taxpayer funded bailout. Doesn’t it give you warm fuzzies that despite your tax dollars being put to work, people are still getting kicked out of their homes?
- Oh, and the whole “losses on the Fed’s books” part of the equation (NY Fed’s holdings of commercial-real-estate debt lost 35% over the two years ending March 2010, while residential loans dropped about 60%)

It also sounds like the Fed owns a lot of strip malls in flyover states now, and while they could repurpose a couple of those to set up large scale printing presses I am not sure what else they might want to do with those, either.

“The market’s loss of confidence, even though it was unjustified and irrational, became a self-fulfilling prophecy,” Cayne said in written testimony to be presented today to the Financial Crisis Inquiry Commission in Washington, according to the person who declined to be identified because the remarks aren’t yet public. Cayne will tell the panel his company had a “strong culture of risk management,” the person said.

Alan Schwartz is expected to stick to a similar script, though he might at least make a cursory nod to the fall of the housing market as being a small issue that snarled up the firm a bit. We expect the Q+A session with Cayne to be far more interesting than this written prepared stuff, so do check that out if you get a chance…

Can you think of a man who can better manage risk than the former Chief Risk Officer of an overleveraged bank that collapsed into itself? Apparently the Fed can’t, because on Halloween, they hired Michael Alix, the Chief Risk Officer from Bear Stearns, as a bank regulation adviser at the New York Fed (thx to Allen Short for the link).

See any problems there?

The appointment goes to the heart of a growing problem that has cropped up along with the myriad rescue efforts aimed at reviving the financial system: few people actually know what was in the risky mortgage bonds that brought the system to a halt.

Analysts say this makes efforts at resolving the problems ripe for conflict of interests, or impropriety at the very least. This certainly seems to be the case in the New York Fed’s new hire. The New York Fed declined to comment on Alix’s appointment.

“Given the exceptional pressures on the global economy and financial system, the damage caused by a default by Bear Stearns could have been severe and extremely difficult to contain,” Bernanke said. “Moreover, the adverse impact of a default would not have been confined to the financial system but would have been felt broadly in the real economy through its effects on asset values and credit availability.”