Fannie starts delinquent loan buys with 220,000 in March

NEW YORK, March 19 (Reuters) - Fannie Mae FNM.P FNM.N, the largest provider of funding for U.S. home mortgages, late on Thursday laid out the pace of its program to buy delinquent loans, starting with a purchase of 220,000 loans in March.

Fannie Mae said in a statement it would "increase significantly its purchases of loans from single-family MBS trusts that are delinquent as to four or more consecutive monthly payments."

The company also set the pace of the program, saying it was finishing the one-time buyouts over 4 months starting with the purchase of 220,000 loans in March.

The buyouts will proceed along agency MBS coupon lines, with higher coupons getting bought out earlier.

This added clarity may allay recent concerns among agency MBS market participants who had been unsure which collateral Fannie Mae would repurchase in March and which in later months.

"In response to market inquiries and in the interest of further transparency, we are now providing additional information about our single-family delinquent loan purchases," Fannie Mae said.

Fannie Mae and its smaller sibling, Freddie Mac FRE.P FRE.N, first announced their respective delinquent buyouts plans in February. Freddie Mac said in February it would repurchase all 120-plus days delinquent loans from agency MBS pools in one fell swoop, which triggered a massive spike in prepayment speeds, a key determinant of MBS valuations.

The clarity of Freddie Mac buyouts contrasted with Fannie Mae, whose buyout plan was surrounded with significant uncertainty over the scale, timing, and sequence.

Fannie Mae earlier this month changed the policy for buying out loans in the Home Affordable Modification Program trials. Starting in March, servicers will be allowed to repurchase such loans, even if not all the documentation has been submitted.

The buyouts can create losses on agency MBS by refunding, or prepaying, principal at face value, instead of at higher prices, where they currently trade.

Prepayment speeds are used by investors to determine the value of mortgage bonds. If prepayment speeds rise or fall too quickly, they hurt returns on mortgage securities.

Prepayments speeds can be voluntary or involuntary. Voluntary prepayments are linked to home loan refinancing activity. Those that are involuntary, or delinquency-related, are expected to increase substantially in 2010, largely because of loan buyouts and loan modifications by the government-sponsored enterprises.

(Editing by Chizu Nomiyama)