Fannie Mae tightens guidelines for MBS loan buyouts

NEW YORK (Reuters) - Fannie Mae FNM.N FNM.P is taking steps that may reduce the number of loans it removes from mortgage-backed securities pools, a policy change that could help the government-controlled finance company's bottom line while also aiding some mortgage bond holders.

The agency announced on Tuesday that it is changing documentation requirements for modifications of delinquent and imminently defaulting single-family mortgage loans under the Obama administration's Home Affordable Modification Program. The move by Fannie Mae could affect the timing for removal of delinquent mortgage loans from MBS pools, the Washington-based firm said.

Under the new rules, Fannie Mae will now require that a loan servicer receive both the last trial period payment and all of the required documentation prior to removing a delinquent mortgage, a change that is likely to slow the process and could reduce the number of loans removed from the pools as they are restructured into new loans.

Fannie Mae reported a net loss of $18.9 billion in the third quarter, compared with a loss of $14.8 billion in the second quarter.

Third-quarter results were largely due to $22 billion of credit-related expenses, reflecting the continued build of the company's combined loss reserves and fair value losses associated with the increasing number of loans that were acquired from mortgage-backed securities trusts in order to pursue loan modifications.

Consequently, Fannie Mae in November was forced to seek $15 billion from the Treasury to remain solvent and active in its role in U.S. housing.

Fannie Mae and rival Freddie Mac are the main conduits for Obama's Home Affordable Modification Program, which aims to ease the foreclosure crisis threatening to upend a nascent economic recovery.

Obtaining required documents has been frustrating for mortgage servicers as they try to complete modifications under HAMP. The process has slowed the conversion of borrowers' trial modifications to a permanently cheaper loan, banking executives at Wells Fargo & Co and elsewhere have said.

"We argued that the disproportional amount of buyouts by Fannie Mae in the third quarter was related to HAMP loans that are still in the trial period, i.e. prior to completion of loan modifications," strategists at Bank of America Merrill Lynch said in a client note on Wednesday.

A Fannie Mae spokeswoman declined to comment on the policy change.

The new loan servicing policy, which was made effective immediately, would likely slow the pace at which Fannie Mae extracts loans from outstanding mortgage bonds, said the Bank of America strategists, led by Vipul Jain.

The change is significant for the $5 trillion agency mortgage-backed securities market since investors owning Fannie Mae MBS will likely see principal returned at a slower rate.

Faster prepayments hurt MBS that are valued above 100, since the principal is returned to the investor at that price. Fannie Mae MBS paying 6 percent interest are priced above 107.

(Editing by Andrea Ricci)