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Fannie Mae updates rules on delinquent loans

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WASHINGTON — Fannie Mae rolled out new rules last week that require home loan servicers to communicate more directly with borrowers who have fallen behind on mortgage payments and expedite arrangements aimed at helping homeowners avoid foreclosure.

The new standards require servicers to take a more consistent approach to how they deal with troubled borrowers, beginning in the initial months after a loan becomes delinquent, through any efforts to modify the terms of the loan and, if necessary, through the foreclosure process.

"We want homeowners to be able to understand their options when facing foreclosure, and we want servicers to reach homeowners early in the process, communicate frequently and clearly, and help homeowners avoid foreclosure," said Jeff Hayward, senior vice president of Fannie Mae's national servicing organization.

Lenders and mortgage servicers, besieged in recent years by an unprecedented wave of foreclosures and delinquent mortgages, have faced criticism over the way they've treated borrowers who fell behind on payments. Many have complained they've had trouble cutting through red tape when attempting to get timely information on their loan or when they've asked for a loan modification.

And last fall, state and federal officials launched investigations into foreclosure procedures used by mortgage servicers and lenders after evidence surfaced that some major banks pushed through hundreds of foreclosures a day without giving many borrowers a fair shot at keeping their homes.

Under the new rules laid out by Fannie Mae (NYSE: FNM), loan servicers must build a "strong customer-service relationship" with homeowners and determine why the borrowers have missed payments, their ability to pay and also educate them on foreclosure prevention options.

Servicers must contact homeowners verbally and in writing within the first 120 days after a loan becomes delinquent and complete a loan modification or other option that keeps the borrower in their home.

Alternatively, the servicer can enter into an arrangement with the borrower that gets them out of the house without going through the foreclosure process. One example is a short sale, when the lender and owner agree to sell the property for less than what is owed on the mortgage.

Fannie Mae asserts that the standards will increase the likelihood that servicers will contact homeowners early in the default process, one of the most important factors in preventing foreclosure.

Should efforts to avoid foreclosure fail, servicers must adhere to a clear timeline that calls for the foreclosure process to begin once a loan has been delinquent for more than 120 days. They also must spell out when a property in the foreclosure process will be sold.

Servicers will be eligible for incentives if they complete loan modifications or other arrangements early in the delinquency period, but will face compensatory fees if they fail to follow the new Fannie Mae rules.

Fannie Mae and its sibling, Freddie Mac, buy home loans from banks and other lenders, package them into bonds with a guarantee against default and sell them to investors around the world.

The companies own or guarantee about half of all mortgages in the United States, or nearly 31 million home loans worth more than $5 trillion. Along with other federal agencies, they backed nearly 90 percent of new mortgages over the past year.

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