Fannie Mae and Freddie Mac are issuing new guidelines to servicers in order to align their procedures for handling past-due mortgages.

The objective is to ensure consistent servicing requirements for loans handled on behalf of the GSEs across four key areas: borrower contact, delinquency management practices, loan modifications, and foreclosure timelines.

The new approach provides monetary incentives for servicers that perform well and imposes fines on those that do not.

Edward DeMarco, acting director of the Federal Housing Finance Agency (FHFA) says the new directive should result in earlier servicer engagement to identify the best solution available for homeowners, given their individual circumstances.

“Once fully implemented by the servicing industry, the enterprises’ aligned policies should give homeowners a greater understanding of the process and faster resolution by requiring earlier contact, more frequent communication, and prompt decisions,” DeMarco said. “Equally important, the newly aligned policies will minimize taxpayer losses by ensuring that enterprise loans are serviced efficiently and fairly.”

The updated guidelines specifically address the so-called “dual track” issue by requiring servicers to contact borrowers as soon as they become delinquent and focus solely on remediating that delinquency. The foreclosure process may not commence if the borrower and servicer are engaged in a “good-faith effort” to resolve the delinquency.

The servicer must conduct a formal review of each case to ensure a borrower has been considered for foreclosure alternatives before the loan is referred for foreclosure. Even after foreclosure processing begins, financial incentives are provided to encourage servicers to continue to help borrowers pursue a foreclosure alternative.

Consistent with statements recently issued by federal and state regulators, DeMarco says this initiative is intended to deal with identified problems in mortgage servicing. The updated framework will:

• Streamline and expedite borrower outreach;
• Mandate the adoption of a new, uniform Borrower Assistance Form as part of a standard Borrower Solicitation Package;
• Align mortgage modification terms and requirements, including a required trial period for all borrowers before a permanent modification;
• Ensure foreclosure processing timelines are consistent between the GSEs, from referrals through date of sale; and
• Establish a consistent schedule of performance-based incentive payments and penalties.

Fannie Mae anticipates providing its servicers with full guidelines on the updated requirements during the second quarter. Fannie’s fact sheet detailing what’s to be expected can be accessed here.

Freddie Mac says it will be implementing the changes with phased effective dates for the majority of the components throughout the summer of 2011. Freddie’s fact sheet can also be found online.