Fannie Mae announced a series of actions this week designed to help borrowers and loan servicers get an early jump on potential mortgage problems and prevent unnecessary home foreclosures among the more than 18 million single-family loans owned or guaranteed by the government-sponsored enterprise (GSE). The new guidelines are intended to give servicers more flexibility and provide additional loss mitigation options — options that will help them catch problem loans before they turn delinquent, as well as provide foreclosure assistance to borrowers whose loans have been pooled into securities.
Fannie Mae said the actions are designed to build on and complement the GSEs’ recently announced streamlined loan modification program (SMP) which targets borrowers who have missed at least three full payments. The new steps announced this week are meant to reach borrowers earlier with foreclosure prevention options.
Previously, Fannie Mae’s foreclosure prevention efforts have been made available to a borrower only after a delinquency occurs. Under the newly issued guidance, loan servicers are directed to use foreclosure prevention tools to assist distressed borrowers as soon as a borrower demonstrates the need for help — even if a borrower is current but default is reasonably foreseeable, the GSE said.
In addition, under Fannie Mae’s existing workout practices, a borrower must sign documents to initiate a trial workout period, and when the trial period is over, the borrower must execute a new agreement to convert the workout to a permanent modification. Fannie Mae said it is initiating a new Early Workout program that allows servicers to pre-negotiate a loan modification that will immediately convert to a permanent modification after the successful completion of the trial workout period. The Early Workout is an option available for any troubled Fannie Mae loan, regardless of delinquency status. The terms of an Early Workout will depend on the servicer’s assessment of an individual borrower’s situation.
Fannie Mae also said that servicers will now be able to offer forbearance and repayment plan arrangements for longer periods. Whenever allowed by the firms’s mortgage-backed securities (MBS) trusts, the maximum period of forbearance (when a borrower’s payments are suspended or reduced) has been increased for most mortgages from 6 months to 12 months. Additionally, the maximum length of a repayment plan (when a borrower makes additional payments over an extended period to bring a loan current) has been increased from 18 to 36 months.

Fannie Mae has also drafted a new MBS trust agreement that will give its servicers the flexibility to remove a loan from an MBS pool after only one month of delinquency, for the purpose of a loan modification — currently loans must be delinquent for four months before they can be removed from an MBS. The new one-month time frame applies only to loans in securities issued on or after January 1, 2009. Trust agreements for pools issued before that date do not allow for this flexibility, but as described above, the new Early Workout program gives servicers the tools to address problem loans as early as necessary, regardless of MBS pool date.
These new policy changes will enable Fannie Mae servicers to provide a uniform, consistent set of foreclosure prevention options for borrowers who demonstrate the need for help, whether a loan is owned by Fannie Mae or is included in a securitized Fannie Mae MBS pool, the GSE explained.
“A borrower’s best chance of avoiding foreclosure is to get help as quickly and efficiently as possible,” said Herb Allison, president and CEO of Fannie Mae. “These changes to our servicing policies are intended to remove administrative obstacles so that Fannie Mae borrowers can get the help they need and avoid foreclosure.
“It is important that all who have a stake in the recovery of the U.S. housing market — including borrowers, investors and lenders — work together to help limit foreclosures, which have both economic and human costs to communities across America. Investors in our MBS will continue to be entitled to receive the payments due on their investments, while Fannie Mae and servicers will have more tools to manage the risk of foreclosure during these unprecedented times,” Allison said.
These steps are the latest in a series of recent actions Fannie Mae has taken to help minimize home foreclosures. Fannie Mae is working with it conservator, the Federal Housing Finance Agency (FHFA), and 27 lenders and servicers in the HOPE NOW Alliance to launch its streamlined loan modification program (SMP) by December 15. In addition, the company has directed servicers to suspend foreclosure sales and the completion of evictions on occupied single-family properties through January 9, 2009.
Sibling mortgage financier Freddie Mac has also taken part in the recent actions mentioned above, and is expected to follow suit with a similar roadmap for early modification measures as well.