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Fannie Enhances Early Loss Mitigation

Announcement 08-31 issued

December 10, 2008

By MortgageDaily.com staff

Fannie Mae has issued a servicer bulletin outlining enhancements to early loss-mitigation practices and clarifying procedures for delinquent loans, modified loans and foreclosed loans.

Servicers can begin loss-mitigation efforts before a loan actually defaults as long as the servicer has become aware of factors that indicate the borrower will default within 90 days, according to Announcement 08-31 issued this week. The basis for determining whether a default is imminent must be documented. However, pre-foreclosure sales, acceptance of deeds-in-lieu of foreclosure and short payoffs are not permitted unless the loan has defaulted.

One form of early loss mitigation is an early workout modification, where the borrower first makes four timely payments in the amount proposed for the modification. The modification becomes effective after the fourth payment is made.

Modified loans will be removed from the mortgage-backed securities pool prior to modification -- a departure from Fannie's previous requirement that modified loans be removed from MBS pools only after four timely modified payments.

All loans that are delinquent for four consecutive months must be removed from MBS pools, though some exceptions can be made to remove loans from MBS pools after one month of delinquency "if the servicer has determined that a loan modification is the appropriate foreclosure prevention option and that the extraordinary circumstances relating to the loan justify the earlier removal of the loan from the MBS pool to facilitate the loan modification."

The Washington, D.C.-based company said six-month forbearances cannot extend past the last scheduled loan payment except for loans pooled under the 1980's Indentures, pooled under the 2009 Trust Agreement or held in Fannie's portfolio. Fannie needs to approve any forbearances that extend beyond 12 months.

Repayment plans should be limited to six months. Plans beyond six months should be in writing, while plans beyond 12 months must be in writing. However, loans pooled under the 2007 Amended Trust Agreement, a 1980's Indenture or the 2009 Trust Agreement can obtain repayment plans up to 18 months. Fannie portfolio loans can also obtain up to 18-month repayment plans.

Fannie said any written loss mitigation agreements should include the period and amount of reduced or suspended payments; the date the forbearance will end; the repayment schedule when regular payments resume; and the date when the default will be cured. The agreement should also include a provision for the servicer to resume foreclosure proceedings if the borrower does not meet the modified repayment terms.

The announcement clarified that any loan which is delinquent at least 24 months must be purchased by the servicer unless the borrower in current on a repayment plan, a pre-foreclosure sale or deed-in-lieu is in process, or the foreclosure process has begun. In addition, delinquent loans in the process of being assigned to a mortgage insurer do not require the servicer to purchase the unit.

Fannie had required that foreclosure be initiated on any loan that was 210 days delinquent but is now requiring that the foreclosure process be started within 105 days of default except to facilitate loss mitigation. Foreclosures should be initiated while the loans are in the MBS trust. Foreclosed loans should be removed from the trust by the end of the third year after acquiring the REO property.

The secondary lender said repossessions must be reported with 24 hours after the foreclosure sale.

Fannie noted that payments collected on any loans cannot be used to liquidate REO properties from MBS pools.

When property ownership is transferred, enforcement of the due-on-sale provision can be waived if the transferee agrees to assume the entire debt, the transferee plans to occupy the property and the original borrower remains liable.

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