GSE chief says mortgage aid plan should be model

By Patrick Rucker

WASHINGTON (Reuters) - U.S. mortgage finance companies should soon adopt a foreclosure prevention plan developed by Fannie Mae (FNM.P) and Freddie Mac (FRE.P) to ease loan terms for troubled borrowers, the companies' overseer said on Thursday.

"I have talked to servicers in the last couple of days. They are telling me that it is important that this standard was set because it gives them a lot more cover and they are going to be more aggressive in modifying loans," said James Lockhart, director of the Federal Housing Finance Agency.

On Tuesday, Lockhart said Fannie Mae and Freddie Mac will cut monthly payments for delinquent borrowers to a point where their payments do not exceed 38 percent of their income.

Fannie Mae and Freddie Mac will begin implementing that forbearance plan in mid-December and Lockhart said that he hopes the nation's two largest sources of mortgage finance will set a standard for the rest of the industry.

"One thing some servicers have told me is that now that Fannie and Freddie have put something forward, they are the standard in the marketplace and that gives them a lot of leeway. I have talked to some of the biggest (subprime) servicers in the last few days and they are very pleased," said Lockhart, who was speaking to reporters after a presentation Thursday afternoon at the New American Foundation, a Washington think tank.

While banks and other finance companies originate home loans, mortgage service companies often collect the monthly checks and are responsible for keeping up with payments.

Fannie Mae and Freddie Mac will apply the new affordability test to all the mortgages that they own or guarantee and the companies' will bear the costs of modifications.

The program will be costly but it is likely to save money in the end since a wave of foreclosures has already eroded the worth of mortgage investments, Lockhart said.

"Investors have already taken some giant hits," he said. "Even the AAA (rated tranches) are in the 80s and the lower tranches are all the way down to zero. In a way, the investors were already taking the hit."

In normal times, Fannie Mae and Freddie Mac have enjoyed an uncommonly favorable position in world capital markets with funding costs not much higher than the federal government. Those spreads have widened in the current financial crisis, but Lockhart said he is confident that they will narrow again.

"I think investors are spooked all over the place," he said. "It is not necessarily a Fannie and Freddie problem, at least not totally. Fannie and Freddie rates are much lower than banks. Now, they are much higher than U.S. Treasuries. It is going to take a while for the dust to settle."

(Reporting by Patrick Rucker; editing by Diane Craft)